MFS® International Equity Strategy and Tariff Update

Kim Hyland: Thanks for joining us. It has been a dynamic period in the global equity markets in the first quarter, and international markets have seen significant shifts. So Chris, tell me what happened in the first quarter. How did the International Equity strategy perform in the context of the overall environment?

Chris Sunderland: Well, it was certainly an eventful and volatile first quarter. I'd say that the international markets performed actually pretty well. Relative to the US markets, they were up about 7% based on the MSCI EAFE Index. That's in US dollar terms. And investors certainly rotated from sort of US-oriented assets to non-US assets in the quarter.

The other area of rotation we saw was growth and value. So I think growth was up about maybe 2% in international space where value was up about 12%. So a 10% spread there. And then within that, the sectors that rotated were technology and consumer discretionary, big sectors in the growth area, they lagged while energy and financials, other dividend yielding areas did well, the value oriented areas.

And then maybe just lastly, I'd say, interestingly, low-quality companies did well versus high-quality companies in the quarter, and that was really in the areas of financials and industrials. So some of the smaller banks, some of the cyclicals within industrials. And so that was a little bit of a relative headwind for the strategy. But all in all, at the end of the day, in the quarter, the strategy did modestly underperform in what was a very strong absolute return for the markets, but not that unexpected given our growth quality bias.

Kim Hyland: So today as we know is April 3rd. Yesterday was Liberation Day. Tariffs are the one and only headline. How is the team thinking about tariffs and implications for the portfolio?

Chris Sunderland: Yes, that was definitely... Liberation Day was yesterday. We're trying to process all the information today. The information is just ever-changing. It's hard to predict, although we did receive some clarity on our side, on the US side, I should say, yesterday. But now we await the responses from all the other countries that were impacted.

I think the good news is that the portfolio is, not completely, but somewhat insulated in certain areas. We're underweight energy. We don't have exposure to auto manufacturers. However, there are other areas where we are going to be impacted. And I would say the alcohol spirits area and the luxury retail names, they'll be impacted for sure. That being said, they've been in the portfolio for a long time, these holdings that we have, and they tend to have strong brands, good pricing power, loyal customer bases, and that at least on a relative basis is going to make them a little more insulated versus the rest of the market.

Kim Hyland: Okay. So why do you think our companies in general, I know you just highlighted some areas, but why do you think they're better positioned to handle the tariffs in the storm?

Chris Sunderland: Yeah. I mean, they're not going to be completely insulated, but if you've got, like I said, strong brands, if you've got products that are hard to substitute, if you have flexible cost structures, if you've got pricing power and, importantly, strong balance sheets, low leverage, you're just going to be able to weather it that much better. And I think we've got a lot of those companies in the portfolio, but no doubt companies will be making supply chain adjustments over the next several months. And our analyst platform is focused keenly on every company in the portfolio and every company that we're looking at right now. And we're in constant communication with the platform.

Kim Hyland: You mentioned that we don't own any of the auto manufacturers, but we do, I think, own some auto parts companies.

Chris Sunderland: Yes.

Kim Hyland: So they could actually, am I right in thinking, maybe benefit?

Chris Sunderland: Yeah. Not every company is going to be negatively impacted to the same degree. Some companies could actually benefit during this. We do own a number of auto components and auto supply companies. And you think about some of the prices, the price increases that you're going to see on a lot of these, especially luxury cars that get imported from Japan, Germany, and whatnot, is going to be a lot of sticker shock out there for these new cars. I think that may lead to people holding onto existing cars. So the existing fleet of cars will get older. That will require more repairs, more parts, and that could benefit some of those companies that we own in the portfolio as well.

Kim Hyland: Okay. So we talked about it was a volatile quarter, lots of uncertainty, which can create a lot of opportunities. Any changes, thoughts, on portfolio positioning?

Chris Sunderland: Yeah. Yes. We think a lot about the macro environment and that certainly informs the bottom-up process as well. And we take advantage of mispricings in volatility as it presents itself. I would say the one area that we've been more active in over the last several quarters has definitely been Japan. We've made several trips there. I went to Japan with the team last year as well. We have another Japan trip coming up later in the fall. And we're seeing companies that have just improving corporate governance, better capital allocation, margin expansion, and still trading at attractive valuations. So that's a space that we continue to be constructive on.

Kim Hyland: Okay. So what kind of ideas in Japan? Can you share?

Chris Sunderland: Yeah, so I would say it varies. It's financials, it's industrials. Just in the first quarter, we topped up two existing names that we've owned for a while, and we just initiated a new position in what I would call a diversified sort of electronics conglomerate, specialty chemical business, which is trading at basically a 14 times PE and is also seeing some of that improving capital allocation. So we're pretty excited about what we're seeing in Japan and we continue to find ideas there.

Kim Hyland: Okay. What is the team focused on in the second quarter, looking forward right now?

Chris Sunderland: Yeah. I'd say one area that we've been underexposed to for a long time, but the fundamentals are improving, has been European banks or European financials. And it's taken a while to warm up to these, but I think the macro environment's improving, what we're seeing with the central banks there in Europe. But also what happened recently in Germany with all these fiscal policies being announced, they're going to let deficits run up a little more. Rates are going to stay higher for longer. That should bode well for a lot of financials, some of the banks. And again, the valuations there are pretty attractive. So it's an area we're working a lot on. We'll see what happens. But yeah, that's an area of interest for the team right now.

Kim Hyland: Any trips planned in the second quarter with the team?

Chris Sunderland: Absolutely. Heading to France in early June. We do many trips during the year with teams of MFSPMs and analysts. This is a trip where we're going to see I think over 20 European CEOs and CFOs, and these are direct one-on-one meetings that we're having with senior management. These are some companies we own, some companies we're thinking about, and we get great access to company management teams, but we really get so much out of these. And it's just, to me, another part of the process, another part of that mosaic, if you will, and building up that bottom-up fundamental view that you have on companies that whether you own them or you're following them.

Kim Hyland: Yep. No, that sounds good. And maybe just to close it out here, how's your crystal ball? What are you guys thinking about the outlook going forward? I know-

Chris Sunderland: I wish I had one.

Kim Hyland: ... it's going to be a... It sounds like it's going to be a challenging year given the tariff announcements and we're in definitely a changing world order.

Chris Sunderland: Yeah, I mean, volatility's here to stay.

Kim Hyland: Yeah.

Chris Sunderland: That can be unnerving, but it can also present tremendous opportunities for long-term investors. I'd say we're definitely in a new regime here with the trade wars, and that's going to have a major impact on anyone's view of growth, of interest rates, of inflation. And one thing we think a lot about at the company level is that range of outcomes, and it's dynamic and it's fluid. But I can tell you based on what we know and what we've seen announced, which was much more significant than anyone expected, is that range of outcomes is wider today than it was yesterday. And so that plays into how we think about sizing positions and being maybe a little bit more cautious at the individual company level. But at the end of the day, rest assured, we're going to continue to invest in high-quality companies that have above-average growth, that trade at reasonable valuations, and we're going to take that long-term view. So a lot's happening, but I look forward to updating everyone again next quarter.

Kim Hyland: Well, thank you. We look forward to hearing from you. I know that the uncertainty and the volatility can be uncomfortable. However, historically, some of these periods have created great buying opportunities to create long-term value for clients. So let's stay close as we move through the year. And thanks for having coffee.

Chris Sunderland: Thank you.

 

The views expressed are those of the speaker and are subject to change at any time.  These views should not be relied upon as investment advice, securities recommendations, or as an indication of trading intent on behalf of any other MFS investment product.  No forecasts can be guaranteed.

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

Stock: Stock market and investments 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

FOR INSTITUTIONAL AND INVESTMENT PROFESSIONALS ONLY

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