The Portfolio outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs four bottom-up factor categories – valuation, earnings growth, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. All of our alpha factor categories delivered positive returns in October. The strategy’s value factors produced positive returns in October, and value remains the best-performing factor in 2023 and over the last twelve months. Our earnings growth and technical factors also posted positive returns last month. Competitive strength generated the highest returns among our bottom-up alpha factor categories in October, and it is the second-best performing factor group over the year-to-date period. Our macroeconomic and country aggregate factors delivered positive monthly returns as countries exhibiting stronger metrics (such as Japan) outperformed those with relatively weaker characteristics (such as Australia). All factor groups remain positive on an inception-to-date basis.
Economic outlook
Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down, and the Euro area PMI remains stuck at a recessionary level.
According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.
Investment outlook
Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of the end of October, the MSCI ACWI ex USA Small Cap Growth Index traded at a 15.7x forward price-to-earnings (P/E) multiple compared to 9.6x for the MSCI ACWI ex USA Small Cap Value Index, a 63% premium, which is the smallest it has been all year.
Another attractive feature of international small caps is that they exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis. This indicates more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term earnings per share growth trend.
International Value Select
Portfolio attribution
The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, pharmaceuticals & biotechnology, and banks industry groups detracted from relative performance. Holdings in the food beverage & tobacco, consumer staples distribution & retail, and utilities industry groups offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included banking & financial services company, Barclays PLC (United Kingdom), and pharmaceutical giant, Sanofi (France). The top contributor to return was health food & beverage producer, Danone (France). Other notable contributors included banking & financial services company, UniCredit S.p.A. (Italy), and convenience store operator, Alimentation Couche-Tard (Canada).
Economic outlook
Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down and the Euro area PMI remains stuck at a recessionary level.
According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.
Investment outlook
The era of cheap money is behind us, and at a minimum we are entering uncharted territory of public sector deficits and rising debt to GDP. We are careful to avoid making investment decisions based on the interest rate regime of the past 15-20 years. We expect an era of higher long term interest rates, even if global economic activity falters. Large budget deficits and overall public sector debt levels, the capital demands required to fund the transition to a low carbon global economy, along with the costs of ongoing armed conflict and aging demographics in the developed countries plus China, suggest that structurally higher long term interest rates will be required to attract capital.
The “higher for longer” theme, coupled with uncertainty about the path of economic activity, will likely result in continued volatility in global equity markets. Causeway’s commitment to detailed and disciplined fundamental research aims to position the team well to identify mispriced securities in this dynamic environment on behalf of our clients.As central banks continue their efforts to control inflation, this will likely lead to an environment of greater equity volatility than in the past 10-15 years. We believe that active management produces superior performance versus passive management in volatile markets. And a greater focus on valuation now that money is not free should favor managers employing a disciplined, value oriented, long term investment approach. Though US stocks—with their overall higher returns on capital—generally deserve to trade at a premium to their non-US peers, the current valuation gaps far exceed long term averages.
Also, the major US indices have become relatively concentrated in a small number of expensive mega-cap stocks. For a passive investor mimicking a market capitalization weighted US index, this creates a level of concentration risk that should be of concern. Using our measure of predicted volatility, broad-based developed market value indices are currently less volatile than growth indices. At a minimum, investors should demand a higher return for owning riskier growth stocks and this is occurring right at the point when long duration (growth) equities are under strain from higher long term interest rates. Relative to history, the portfolio’s valuation characteristics indicate upside potential that, in our view, more than justifies the risk. We anticipate the portfolio’s below benchmark return on equity (ROE) will continue to improve as the earnings of some of the bigger holdings progress through the end of 2024. Our investment teams’ demands of company management—holding managements accountable to improve earnings and cash flow—should help drive portfolio ROE higher in the years ahead.
International Opportunities
Portfolio attribution
The Portfolio modestly underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the pharmaceuticals & biotechnology, capital goods, and technology hardware & equipment industry groups detracted from relative performance. Holdings in the food beverage & tobacco, utilities, and consumer staples distribution & retail industry groups offset some of the underperformance compared to the Index. The largest detractor was banking & financial services company, Barclays PLC (United Kingdom). Additional notable detractors included rolling stock, signaling, & services provider for the rail industry, Alstom SA (France), and pharmaceutical giant, Sanofi (France). The top contributor to return was health food & beverage producer, Danone (France). Other notable contributors included banking & financial services company, UniCredit S.p.A. (Italy), and electric, gas & renewables power generation & distribution company, Enel SpA (Italy).
Economic outlook
Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, the Euro area PMI remains stuck at a recessionary level.
In China, the largest country within the EM index, authorities announced the approval of 1 trillion yuan in additional Treasury bonds in 2023. The issuance equals approximately 0.8% of China’s gross domestic product and the funds will be used to rebuild areas impacted by recent floods and to improve urban infrastructure. In addition to accommodative monetary policy and measures aimed at supporting the ailing property market, this is the latest action designed to stimulate the economy. In China, we are identifying compelling investment opportunities in the interactive media and consumer discretionary industries.
Investment outlook
The era of cheap money is behind us, and at a minimum we are entering uncharted territory of public sector deficits and rising debt to GDP. We are careful to avoid making investment decisions based on the interest rate regime of the past 15-20 years. We expect an era of higher long-term interest rates, even if global economic activity falters. Large budget deficits and overall public sector debt levels, the capital demands required to fund the transition to a low carbon global economy, along with the costs of ongoing armed conflict and aging demographics in the developed countries plus China, suggest that structurally higher long term interest rates will be required to attract capital.
After appearing less attractive for much of the year, earnings growth upgrades for EM equities are becoming more attractive relative to those in ex-US developed markets. Within EM, the energy sector is experiencing the most net upgrades, buoyed by rising oil prices. On the negative side, materials stocks are experiencing the most net downgrades due to lackluster demand for most commodities. Within EM, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to EM small cap stocks was near the high end of the historical range at month-end.
As central banks continue their efforts to control inflation, this will likely lead to an environment of greater equity volatility than in the past 10-15 years. We believe that active management produces superior performance versus passive management in volatile markets. And a greater focus on valuation now that money is not free should favor managers employing a disciplined, value-oriented, long-term investment approach.
Emerging Markets Equity
Portfolio attribution
Over the month, Portfolio holdings in the emerging Asia region detracted from relative performance, primarily attributable to negative stock selection in Taiwan and China. In emerging Europe, Middle East, and Africa (“EMEA”), underweight positions in Turkey and Poland detracted from relative performance. Stock selection in Brazil contributed to relative performance in emerging Latin America. From a sector perspective, information technology, industrials, and health care were the largest detractors from relative performance. Consumer discretionary and materials were the top contributors to relative performance in October. The largest stock-level detractors from relative performance included overweight positions in oil & gas producer, PetroChina Co., Ltd. (China), construction equipment manufacturer, Hyundai Doosan Infracore Co., Ltd. (South Korea), and electrical equipment and machinery component manufacturer, LS Corp. (South Korea). The top stock-level contributors to relative performance included overweight positions in banks, Banco do Brasil SA (Brazil), and China Construction Bank Corp. (China), as well as an underweight position in steelmaker, POSCO Holdings Inc. (South Korea).
Economic outlook
In its September meeting, the US Federal Reserve (“Fed”) left its target interest rate unchanged. However, the yield on the 10-Year US Treasury Note continued to march higher in October, which is helping the Fed achieve its objective of slowing the economy. US inflation appears to be moderating and, while the non-farm payroll report exceeded expectations, it appears that most of the gains came from either government or part-time jobs. We believe the backdrop of slowing inflation, a modestly cooling US job market, and a flattening US yield curve will provide a tailwind for EM stocks. Most EM currencies rebounded in October. While depreciating EM currencies generally improve export competitiveness for EM countries, the capital flight out of depreciating currencies has historically been a larger driver of EM stock returns in US dollars. Therefore, a rebound of most EM currencies relative to the US dollar should be a positive for many EM stocks.
In China, the largest country within the EM index, authorities announced the approval of 1 trillion yuan in additional Treasury bonds in 2023. The issuance equals approximately 0.8% of China’s gross domestic product and the funds will be used to rebuild areas impacted by recent floods and to improve urban infrastructure. In addition to accommodative monetary policy and measures aimed at supporting the ailing property market, this is the latest action designed to stimulate the economy. We are overweight Chinese stocks in the portfolio due in part to attractive valuations, particularly in the interactive media and consumer discretionary industries.
Investment outlook
After appearing less attractive for much of the year, earnings growth upgrades for EM equities are becoming more attractive relative to those in ex-US developed markets. Within EM, the energy sector is experiencing the most net upgrades, buoyed by rising oil prices. Asian information technology stocks also have strong net upgrades, due primarily to an improving outlook for large semiconductor stocks. On the negative side, materials stocks are experiencing the most net downgrades due to lackluster demand for most commodities. In the Portfolio, we are underweight materials stocks due primarily to unattractive growth characteristics. Industrials stocks also have net downgrades, primarily in China and South Korea. In export-oriented South Korea, the downgrades reflect the slowing global economy. In China, the net downgrades are due to both internal and external factors. Within EM, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to small cap stocks was near the high end of the historical range at month-end.
Global Value Equity
Portfolio attribution
The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, technology hardware & equipment, and software & services industry groups detracted from relative performance. Holdings in the energy and utilities industry groups, as well as an underweight position in the automobiles & components industry group, offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included banking & financial services company, Barclays PLC (United Kingdom), and pharmaceutical products & services company, Avantor, Inc.(United States). The top contributor to return was property & casualty insurer, The Allstate Corp. (United States). Other notable contributors included health food & beverage producer, Danone (France), and clinical laboratory, Quest Diagnostics, Inc. (United States).
Economic outlook
Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down and the Euro area PMI remains stuck at a recessionary level.
According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.
Investment outlook
The era of cheap money is behind us, and at a minimum we are entering uncharted territory of public sector deficits and rising debt to GDP. We are careful to avoid making investment decisions based on the interest rate regime of the past 15-20 years. We expect an era of higher long term interest rates, even if global economic activity falters. Large budget deficits an overall public sector debt levels, the capital demands required to fund the transition to a low carbon global economy, along with the costs of ongoing armed conflict and aging demographics in the developed countries plus China, suggest that structurally higher long term interest rates will be required to attract capital.
The “higher for longer” theme, coupled with uncertainty about the path of economic activity, will likely result in continued volatility in global equity markets. Causeway’s commitment to detailed and disciplined fundamental research aims to position the team well to identify mispriced securities in this dynamic environment on behalf of our clients.As central banks continue their efforts to control inflation, this will likely lead to an environment of greater equity volatility than in the past 10-15 years. We believe that active management produces superior performance versus passive management in volatile markets. And a greater focus on valuation now that money is not free should favor managers employing a disciplined, value oriented, long term investment approach. Though US stocks—with their overall higher returns on capital—generally deserve to trade at a premium to their non-US peers, the current valuation gaps far exceed long term averages.
Also, the major US indices have become relatively concentrated in a small number of expensive mega-cap stocks. For a passive investor mimicking a market capitalization weighted US index, this creates a level of concentration risk that should be of concern. Using our measure of predicted volatility, broad-based developed market value indices are currently less volatile than growth indices. At a minimum, investors should demand a higher return for owning riskier growth stocks and this is occurring right at the point when long duration (growth) equities are under strain from higher long term interest rates. Relative to history, the portfolio’s valuation characteristics indicate upside potential that, in our view, more than justifies the risk. We anticipate the portfolio’s below benchmark return on equity (ROE) will continue to improve as the earnings of some of the bigger holdings progress through the end of 2024. Our investment teams’ demands of company management—holding managements accountable to improve earnings and cash flow—should help drive portfolio ROE higher in the years ahead.
International Value Equity
Portfolio attribution
The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, pharmaceuticals & biotechnology, and banks industry groups detracted from relative performance. Holdings in the food beverage & tobacco, consumer staples distribution & retail, and utilities industry groups offset some of the underperformance compared to the Index. The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included banking & financial services company, Barclays PLC (United Kingdom), and pharmaceutical giant, Sanofi (France). The top contributor to return was health food & beverage producer, Danone (France). Other notable contributors included banking & financial services company, UniCredit S.p.A. (Italy), and convenience store operator, Alimentation Couche-Tard (Canada).
Economic outlook
Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down and the Euro area PMI remains stuck at a recessionary level.
According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.
Investment outlook
The era of cheap money is behind us, and at a minimum we are entering uncharted territory of public sector deficits and rising debt to GDP. We are careful to avoid making investment decisions based on the interest rate regime of the past 15-20 years. We expect an era of higher long term interest rates, even if global economic activity falters. Large budget deficits and overall public sector debt levels, the capital demands required to fund the transition to a low carbon global economy, along with the costs of ongoing armed conflict and aging demographics in the developed countries plus China, suggest that structurally higher long term interest rates will be required to attract capital.
The “higher for longer” theme, coupled with uncertainty about the path of economic activity, will likely result in continued volatility in global equity markets. Causeway’s commitment to detailed and disciplined fundamental research aims to position the team well to identify mispriced securities in this dynamic environment on behalf of our clients.As central banks continue their efforts to control inflation, this will likely lead to an environment of greater equity volatility than in the past 10-15 years. We believe that active management produces superior performance versus passive management in volatile markets. And a greater focus on valuation now that money is not free should favor managers employing a disciplined, value oriented, long term investment approach. Though US stocks—with their overall higher returns on capital—generally deserve to trade at a premium to their non-US peers, the current valuation gaps far exceed long term averages.
Also, the major US indices have become relatively concentrated in a small number of expensive mega-cap stocks. For a passive investor mimicking a market capitalization weighted US index, this creates a level of concentration risk that should be of concern. Using our measure of predicted volatility, broad-based developed market value indices are currently less volatile than growth indices. At a minimum, investors should demand a higher return for owning riskier growth stocks and this is occurring right at the point when long duration (growth) equities are under strain from higher long term interest rates. Relative to history, the portfolio’s valuation characteristics indicate upside potential that, in our view, more than justifies the risk. We anticipate the portfolio’s below benchmark return on equity (ROE) will continue to improve as the earnings of some of the bigger holdings progress through the end of 2024. Our investment teams’ demands of company management—holding managements accountable to improve earnings and cash flow—should help drive portfolio ROE higher in the years ahead.
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