LISIX – Q2 2019 Commentary
The Lazard International Strategic Equity strategy outperformed the EAFE benchmark during the quarter, driven by positive stock selection. Global macroeconomic data has continued to slow and it is unclear if the Fed’s loosening of economic policy will be enough to dampen the slow down. This does provide some relative buying opportunities for the team as certain names have heightened valuations backed by lower interest rates.
Market Overview:
– International equities rose in the second quarter despite falling back in May as trade talks went into reverse
o Breakdown of US-China trade talks saw the announcement of 25% tariffs on many Chinese goods followed by an escalation of the restrictions on Chinese telecom equipment company Huawei
– These developments are potentially negative for both shorter-term economic activity and longer-term economic growth
o Global supply chains increasingly being called into question
– Continued fall in bond yields amidst dovish rhetoric from the Fed supported asset prices
o Helped at the end of the quarter by hopes of further trade talks
– For the quarter, more defensive areas such as staples, health care, real estate and utilities lagged
o Capital good and technology rose
Performance Overview:
– The strategy performed broadly in line with the MSCI EAFE Index for the quarter, helped by stock selection in the consumer staples, health care, and financial sectors
o Encouraging results supported personal care company Beiersdorf, European Coca-Cola, global broker Aon, and National Bank of Canada
– Stock selection in the energy, communication services and consumer discretionary sectors hurt relative performance
o In the industrial sector, there were weaker U.S. grocery trends for packaging distributor Bunzl, and weak European air travel demand for low cost airline Ryanair
o Japanese credit company Aeon Financial and French video game maker Ubisoft also saw weak results
Market Outlook:
– Globally the macroeconomic data has continued to slow, but with the Fed’s dramatic shift in policy
o Gentle stimulus in China the outlook for the second half of 2019 was more promising
o This has now been overshadowed by the escalation of hostile trade measures between the United States and China
– Monetary policy continues to ease, with the Fed now suggesting rate cuts are being considered
o It is not clear this will be sufficient to arrest the cooling of economic activity
– This has created a difficult construct in markets where many stable businesses are trading at very high valuations on the back of low interest rates
o More cyclical businesses, with lower returns and short-term economic pressure are trading at increasingly low valuations
– Overall, the portfolio team remains confident that, by focusing on stock selection and seeking stocks with sustainably high or improving returns trading at attractive valuations, the strong long-term track record of funds will continue
Performance Review:
Peter Malone, CFA
Research Analyst
Direct: 617.226.0030
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109