MFS® International Equity Strategy - Quarterly Portfolio Update

Hi. My name is Brett Fleishman, and I am one of the institutional portfolio managers on our International Equity strategy. I’m excited to be here today to review performance and also touch on two key events that impacted non-US markets during the third quarter of 2024.

The MSCI EAFE Index rallied 7.3% in the third quarter after appreciating 5.3% in the first half of the year. Though the market rally continued, market leadership changed in the third quarter, with two of the most defensive sectors — real estate and utilities — performing the best. Conversely, information technology — the best-performing sector in the first half of the year — was one of only two sectors, along with energy, to decline in the third quarter. Investor concerns about the returns on AI-related spending, expensive valuations and a slowing economy negatively impacted semiconductor stocks, the worst-performing industry in the third quarter.

Though historically it has been more challenging for this strategy to outperform the MSCI EAFE index in strong up-market quarters, we did outperform this quarter. Strong stock selection in the information technology and consumer discretionary sectors was the primary reason why the strategy outperformed. Additionally, our avoidance of Japanese value stocks — and more specifically Japanese auto manufacturers, banks and trading companies — positively contributed to the strategy’s relative performance this quarter. 

Speaking of Japan, the markets experienced significant volatility at the end of July when the Bank of Japan raised interest rates to 0.25%, its highest level since 2008. Soon after, the US Bureau of Labor Statistics reported July nonfarm payroll data that was much weaker than expected, fueling speculation that the Fed would start cutting interest rates soon. This simultaneous change in interest rate expectations — higher rates in Japan and lower rates in the US — resulted in significant volatility as the yen carry trade —investors borrowing cheaply in yen to invest in a much higher-yielding US dollar — unwound. By the close of trading on August 5, the MSCI EAFE Index was down 4.6% for the quarter.

But the market selloff was short-lived as investor expectations for impending rate cuts drove equities higher. In September, the Fed did, in fact, cut interest rates, and the 50-basis-point cut was larger than what many investors had anticipated. This rate cut — the first by the Fed since its rate-hiking cycle began in early 2022 — and Chinese stimulus measures announced near quarter end were the primary catalysts behind the MSCI EAFE Index’s 12.5% rise from August 6 through quarter-end.

While investors often associate the start of a rate-cutting cycle with strong ensuing stock performance, the reality is that stock returns have been quite mixed the year following the Fed’s first interest rate cut. This slide highlights the subsequent 12-month performance of the MSCI EAFE Index after the Fed’s first rate cut, capturing 17 periods over a nearly 50-year span. Over this timeframe, the MSCI EAFE Index rose more than 5% 10 times, declined more than 5% 5 times — including the last three times the Fed cut rates — and was nearly unchanged twice. This slide also reveals that the US economy went into recession 10 times and avoided recession 7 times. Currently, most economists are assuming the US economy will avoid recession.

While no economists are forecasting a recession in China, many investors are debating whether the recently announced stimulus measures will, in fact, stimulate Chinese consumption. The stimulus measures announced near quarter-end included interest rate cuts, low-cost financing to support Chinese equities and potential fiscal stimulus. While these measures are a step in the right direction, it is unclear whether they will be sufficient to reignite Chinese consumption. For perspective, the aggregate annual household savings from the 50-basis-point mortgage rate cut represent less than one percent of personal consumption. For Chinese consumption to increase meaningfully, property prices need to, at a minimum, stop declining.

While Chinese equities rebounded sharply after the stimulus measures were announced, this rebound might have simply reflected severely depressed stock valuations re-rating on positive news. At the end of August, before the stimulus measures were announced in late September, Chinese equities were trading at 20-year-low valuations relative to the MSCI World Index.

As the fourth quarter begins, there is no shortage of macroeconomic and geopolitical events that will impact non-US markets. More specifically, the US elections and continuing turmoil in Europe and the Middle East are likely to create continuing volatility in the short term. Having said that, as long-term investors, we view these short-term dislocations as opportunities — either to add to opportunities on market weakness or trim existing positions on market strength. We believe this investment approach will benefit our clients over the coming years.

Thank you very much for listening to the third-quarter update, and we look forward to speaking with you again soon.

 

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The views expressed are those of the speakers and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Past performance is no guarantee of future results.

Important Risk Considerations:
The strategy may not achieve its objective and/or you could lose money on your investment.

Stock: Stock markets and investments in individual stocks are volatile and can decline significantly in response to or investor perception of, issuer, market, economic, industry, political, regulatory, geopolitical, environmental, public health, and other conditions.

International: Investments in foreign markets can involve greater risk and volatility than U.S. investments because of adverse market, currency, economic, industry, political, regulatory, geopolitical, or other conditions.

Please see the applicable prospectus for further information on these and other risk considerations.

The portfolio is actively managed, and current holdings may be different.

Index data source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

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