International Equity Strategy Commentary

International equities made further gains in Q2 despite volatility and weakness in early April due to the threat of significant US tariffs. The EAFE index rose 4.8% in local currency terms and 11.78% in US dollar terms. Communication services was the best performing sector (up 14.24%) reflecting growth in data consumption and video streaming along with a boost to media from ad budgets rebounding. Energy was the worst group (down 6.74%) despite the attack on Iran’s nuclear and military infrastructure by Israel – the oil price nevertheless ended the quarter down 9.5% as measured by Brent.

US inflation data came in softer than expected, with welcome slowdowns in core services and shelter components, reinforcing hopes for Federal Reserve rate cuts later this year. The Fed held its policy rate steady at its June meeting while maintaining a cautious tone, highlighting tariff uncertainty as an ongoing risk. In the labour market, the ADP report showed unexpected private-sector job losses, but the official nonfarm payrolls print surprised on the upside, highlighting mixed signals about underlying economic momentum. Equities ground higher despite these crosscurrents as market participants attempted to balance geopolitical news, tariff announcements, moderating inflation, resilient employment data and uncertainty about the Fed’s next move.

Germany’s constitutional amendment to relax its debt brake to allow an expansion of fiscal policy, notably defence spending, is significant and, for some investors, supports the shift away from US stocks towards non-US markets. The policy has given another boost to European cyclical stocks with quality continuing to underperform. In the UK, employment numbers were shockingly weak but inflation has been pushed temporarily higher by policy decisions, causing the MPC to maintain its “gradualist” approach to rate cuts.

In Asia, Japanese stocks swung between protectionist anxieties and relief driven rallies as ‘Independence Day’ tariffs were paused. High headline inflation reflects food supply issues, with core inflation below 2%, arguing against further BoJ tightening. In China exports have shown limited weakness to date despite a fall in shipments to the US, reflecting a combination of re-routing and diversion to other markets. Meanwhile, US dollar weakness has taken pressure off the RMB, allowing money market rates to fall further.

Sector selection was the main positive over the period with the overweights in IT and industrials and an underweight in energy all adding value. Stock selection was strong in materials and IT. Heidelberg Cement (+33%) benefits from a lack of exposure to tariffs and German fiscal expansion while ASM International (+36%), a manufacturer of equipment used in semiconductor fabrication, reported at the top end of guidance with improved margins and strong demand in China. On the downside in IT, not owning Advantest (+61%) hurt as demand for AI semiconductor testers rose. Performance was negative in industrials where machine power tool makers Makita (-11%) and Techtronic (-12%) were hit by ‘Liberation Day’ tariff announcements, while not owning Siemens Energy (+88%) was a negative – investors view the company as an energy transition play and pushed the share price higher in response to better than expected numbers accompanied by broker upgrades.
In consumer staples, Japanese food manufacturer Ajinomoto (+30%) has exposure to AI through its build-up film product used for semiconductors. Management is successfully focusing on improving return on invested capital (ROIC). Another AI play is holding company Softbank (+38%), which rebounded on the back of the share price of its largest asset, chip designer Arm. In healthcare, Swiss biotech services company Lonza (+11%) rose in a weak sector. The group is seen as a beneficiary of pharma tariffs driving companies to re-shore production.

Activity over the quarter has raised exposure to defence-related names including the introduction of Rolls Royce and Babcock in the UK and Singapore Tech. Aerospace engine maker Rolls Royce is benefitting from improved operational performance and an easing of supply chain issues, while Babcock is now predominantly defence orientated after disposals, having strong positions in nuclear and maritime as well as good revenue visibility. We added Singapore Technologies Engineering after a positive meeting with the CEO. The company supplies munitions and military equipment and has a strong position in cybersecurity.
In consumer staples we have introduced French company Danone which is benefiting from structural growth in health food nutrition with strong positions in probiotics and protein products. Also in France we have added Publicis which specialises in data, media, consulting, technology, and artificial intelligence. It scompetition is in disarray and the company is taking market share and attracting new clients. In the UK we have bought Rightmove, the leading online property portal, which was subject to a recent unsolicited bid, sharpening management’s focus on growth opportunities. In communications we have added Dutch incumbent KPN, which is active only in Netherlands where it has a dominant market share in a three player market, allowing for more attractive pricing dynamics.
We have funded these purchases with a range of sales across sectors. We have reduced financials by exiting Hong Kong Exchanges, thereby lowering exposure to US/China trade war risk, while trimming Macquarie Group in Australia, which is struggling to raise its return on equity. We have exited building materials group James Hardie and reduced online property group Xero after acquisitions that appear to dilute ROIC at best and may be value destructive. In staples we have exited Nestle and Remy Cointreau as well as LVMH in consumer discretionary.

Money trends suggest weakening economic prospects for late 2025, with tariff effects – including payback for a front-loading of activity – set to act as a drag nearer term. We expect the inflation boost from tariffs to be small and temporary with the monetary backdrop still disinflationary. The excess money backdrop has weakened since end-Q1. Investors have begun to question ‘US exceptionalism’, which has helped EAFE markets outperform so far in 2025, and there is growing debate about whether a slowdown in capital flows to the US will accompany a fall in imports due to tariffs – the weak dollar partly reflects this. A significant risk to equities, in our view, is that large fiscal deficits in some countries cause a buyers’ strike by the bond vigilantes, pushing up longer-term yields.
We favour Europe encouraged by the policy shift in Germany, but are underweight Japan where very weak money growth suggests a BoJ policy error and poor economic prospects. Emerging markets appear attractive relative to developed but the risk of further tensions between the US and China means we would rather delay adding until we have clarity on the future trading relationship. Subdued core inflation should allow policy makers to ease policy further which could help quality/growth stocks recover some lost relative performance. We believe the AI theme has further to run with increased spending benefiting a range of stocks across the IT sector. The portfolio is zero weighted autos and miners and underweight retailers and banks. The emphasis is on companies with pricing power and structural growth leading to overweights in software, media, insurance, capital goods and professional services.

The Composite rose by 12.42% (12.25% Net) versus a 11.78% rise for the benchmark.