Q3 2025 International and Global Growth Fund Commentary
Market Recap
Global equity markets delivered strong returns in the third quarter of 2025, buoyed by the resolution of several key trade disputes and a dovish shift in U.S. monetary policy. Uncertainty surrounding the “Liberation Day” tariffs eased as the U.S. formalized agreements with the European Union (EU), Japan, South Korea, and others. These deals established a higher baseline for global tariffs but crucially removed the threat of punitive reciprocal rates. Separately, the Federal Reserve (the Fed) cut U.S. interest rates in September, driven by evidence of a softening labor market. This easing occurred despite inflation remaining moderately above target, as the impact of tariffs began to filter into economic data.
As we enter the fourth quarter, the outlook is cautious. Markets are closely watching the Fed's ability to support a weakening U.S. consumer while managing the latent inflationary pressures from the new tariff regime. Meanwhile, Europe maintains a stable but modest growth trajectory, and China continues to navigate its property sector challenges with incremental policy support. The resilience of the global economy will be tested by these diverging economic trends and the impact of a restructured global trade environment.
While we underperformed this past quarter, our concentrated, conviction-weighted portfolios are designed to outperform market growth rates over an investment cycle. We prioritize businesses that align with secular trends and have strong competitive advantages and market positions. Our portfolio companies are chosen for their high profit margins, strong balance sheets, and consistent cash generation. We believe these qualities will endure even in challenging macroeconomic conditions.
Outlook
Looking ahead, the global economic environment is characterized by diverging policy trajectories and the residual effects of a tumultuous year in trade policy. While the recent easing of monetary conditions and the formalization of trade agreements have provided support to equity markets, the underlying economic fundamentals—particularly slowing labor markets and the latent inflationary impact of tariffs—warrant a cautious outlook.
In the U.S., the trajectory of monetary policy will be the central focus. Having initiated an easing cycle in September, the Fed is now navigating the complex trade-off between supporting a weakening labor market and managing inflation that remains stubbornly above target. The Fed’s latest Summary of Economic Projections reflects this tension. The median projection suggests an additional 50 basis points of cuts by year-end. The forecasts also revised 2025 GDP growth slightly higher to 1.6%, but maintained the unemployment rate forecast at 4.5% by year-end. Crucially, the core PCE inflation forecast remains elevated at 3.1% for 2025 and 2.6% for 2026.
The Fed's path forward will be highly data-dependent, with a particular sensitivity to labor market downside risks. However, the risk of an inflationary surprise remains salient. While the pass-through of tariffs to consumer prices has been delayed, it is increasingly likely to materialize as inventory buffers are depleted and businesses face sustained margin pressure. Furthermore, new sector-specific tariffs announced in late September on pharmaceuticals, furniture, and heavy trucks, effective October 1, will add fresh pressure. If inflation accelerates more sharply than anticipated, the Fed may be forced to pause its easing cycle, potentially unsettling markets that have priced in continued accommodation.
The health of the U.S. consumer remains a critical variable. Consumption growth has moderated, and the recent decline in consumer confidence suggests households are becoming increasingly cautious. With the labor market softening and real wage growth stagnating, the capacity for consumers to drive economic expansion is diminishing.
Europe presents a somewhat mixed outlook. The eurozone economy is expected to grow modestly, supported by the significant fiscal stimulus announced earlier in the year, including Germany’s infrastructure program and increased EU-wide defense spending. The resolution of tariffs with the U.S., while resulting in a 15% baseline tariff, removed the immediate threat of punitive measures and should provide some stability to the export-oriented manufacturing sectors.
The European Central Bank’s (ECB) maintained its policy rates in September, signaling a pause after an aggressive easing cycle in the first half of the year that brought the deposit rate to 2%. The ECB’s latest staff projections forecast headline inflation averaging 2.1% in 2025 and economic growth at a subdued 1.2% in 2025. Given that inflation is near target and the economic outlook is stable, the ECB appears to be in a holding pattern.
China continues to navigate a challenging economic transition, exacerbated by external trade pressures. The government remains committed to achieving its growth target of around 5%, but the persistent weakness in the property sector and fragile consumer confidence necessitates ongoing policy support. While the government has ramped up targeted fiscal spending and the People’s Bank of China has maintained loose monetary conditions, the reluctance to deploy broad-based stimulus or direct household support limits the potential for a robust recovery in domestic demand.
The structural reforms required to shift China towards a consumer-driven growth model remain stalled. Policymakers continue to prioritize industrial upgrading and technological self-reliance, reinforcing the economy's dependence on investment and exports. This strategy is increasingly precarious in the current global trade environment. While the U.S.-China trade truce remains intact, the relationship is fragile, and the risk of renewed escalation persists. Without a meaningful rebound in domestic consumption, China’s growth trajectory remains vulnerable to external shocks and the ongoing deleveraging in the real estate sector.
In International portfolios, roughly 19% of assets are invested in Greater China holdings, which is overweight relative to the benchmark. In Global portfolios, roughly 13% of assets are invested in Greater China holdings, which is overweight relative to the benchmark. We believe our Chinese holdings are at valuation levels, in the context of their long-term growth outlooks and competitive positioning, that more than compensate us for the risks. Our Chinese holdings are exposed to secular growth areas of the domestic economy (private consumption and health care) that align with government priorities, have strong balance sheets and resilient cash flows, and are not reliant on restricted Western technology inputs for future growth.
Our investment strategy focuses on companies we believe are positioned to benefit from lasting secular trends, with strong competitive advantages and leading market positions. Our portfolios emphasize businesses with solid margins, healthy balance sheets, and consistent cash flow, which we view as key to maintaining resilience in difficult environments. In our opinion, this approach supports the potential for long-term outperformance. We believe our investment process is not affected by tariffs, and the well-defined characteristics of our portfolio companies mean they should be much better able to withstand external economic shocks.
Some of the most compelling long-term growth drivers are often less affected by near-term global events or regional fluctuations. We see these opportunities in areas such as cloud computing, software-as-a-service, digital transformation, artificial intelligence, semiconductor technology, e-commerce, payment systems, industrial automation, electric vehicles, and innovative biologic and biosimilar therapies. We also recognize strong potential in the expansion of consumer markets, particularly across emerging economies—notably in Asia— where rising demand for consumer products and financial services continues to accelerate. In our view, a slowdown in global economic growth should not diminish the durability of these investment themes, or the market leadership and business models of the companies we own.
While U.S. market valuations remain elevated—with the cyclically adjusted price-to-earnings (CAPE) ratio approaching historical highs—international markets trade at considerably lower valuations, providing stronger prospects for long-term returns. Thus, we remain strategically positioned with a preference for international equities. We believe our selective approach and emphasis on quality will effectively mitigate tariff-related risks while capitalizing on secular growth and valuation-driven opportunities.
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The above commentary does not provide a complete analysis of every material fact regarding any market, industry, security or portfolio.
*Includes China, Hong Kong, and Prosus.