Global Markets Weather Report: Calamos International Growth Fund Edition

Nick Niziolek, CFA, Dennis Cogan, CFA, Paul Ryndak, CFA, and Kyle Ruge, CFA

Summary Points:

• Global equity markets saw significant leadership rotations over the quarter, as markets cycled through fear and optimism about monetary policy and economic growth.
• We maintain a sizable allocation to secular growth names, reflecting our conviction in the opportunities of this cohort and our expectation for reasonable economic growth and falling inflation over the shorter-to-medium term.
• However, we believe market conditions call for a more balanced approach among secular growth, cyclical growth, and defensive names. Like autumn in Chicago when many things can happen weatherwise, we see elevated potential for shifts in global growth and inflation trajectories.
• Artificial intelligence, data center capital spending, healthcare innovations like GLP-1s, and regional growth stories like India’s are well represented in the portfolio, and we have also increased exposure to growth opportunities with more pronounced defensive characteristics.

“You know what they say about Chicago. If you don’t like the weather, wait 15 minutes.”

During the third quarter, Ralph Kiner’s famous quote about Chicago weather could have easily been applied to global equities. Broadly, global equity markets demonstrated continued strength, although the industries and factors driving returns shifted throughout the quarter.

Indeed, in the span of three months, markets vacillated between confidence that central bank policy easing would support economic growth and fears that central banks were dragging their feet and opening the door to recession. As the end of the quarter approached, markets refocused on the likelihood that a more benign disinflationary growth environment would continue, favoring the secular growth companies and themes that have performed well over the past several quarters. However, there was still another twist in store, as China announced significant policy stimulus during the final days of the quarter, spurring yet another rotation toward Chinese equities and global cyclical beneficiaries generally.

Despite the challenges of this rotational environment, the fund has delivered strong returns in absolute terms for the year-to-date and one-year periods, also outperforming its benchmark.

CIGIX: Year-to-Date and 1-Year Outperformance

Source: Morningstar.
Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Please refer to Important Risk Information. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Fund’s maximum front-end sales load of 4.75%. Had it been included, the Fund’s return would have been lower. All performance shown assumes reinvestment of dividends and capital gains distributions. As of the prospectus dated 3/1/2024, CIGIX’s gross expense ratio is 1.24%.

Our team’s investment framework incorporates top-down elements to help guide our bottom-up research and portfolio construction. Identifying and investing alongside global secular themes is a pillar of this top-down framework (for more, see our paper “Identifying Global Growth Opportunities Through a Thematic Lens”). We also pay close attention to more cyclical macroeconomic conditions to understand the current environment and to identify potential inflection points in growth and inflation rates. During the third quarter, the possibility of multiple possible inflection points in the cyclical outlook came into focus.

We have sought to position Calamos International Growth Fund for opportunities while bracing it for more rotations and the potential for different inflection points. We think about the portfolio’s macroeconomic exposures in three groups that share similar sensitivities to different macroeconomic environments: secular growth, cyclical growth, and defensive.

Market Regimes: A Framework for Identifying Opportunities and Risks

Secular Growth. We’ve specifically geared our process to identify these types of businesses. Companies in this cohort capitalize on long runways for above-average growth and include those benefiting from growth themes, innovations, and productivity enhancements. They are less reliant on the overall level and trend of economic growth because they are creating their own organic revenue and earnings growth. Investors particularly favor these companies during periods of low or falling inflation and reasonably strong growth. We have been in this environment since early 2023, and our focus has been on positioning around the best secular themes and companies benefiting most from them.

Cyclical Growth. Businesses in the cyclical growth cohort often need stronger cyclical growth tailwinds to produce attractive relative revenue and earnings growth. As such, companies in this cohort tend to demonstrate better fundamentals and are rewarded more by the market during times of broad economic strength, such as during early or mid-cycle expansions. They are typically more vulnerable during periods of slowing growth, particularly during recessionary periods.

Defensive. These businesses are typically less sensitive to changes in the economic landscape and are more mature in their growth lifecycle. Defensive companies typically offer healthy balance sheets, strong cash flows, and the ability to steadily return capital to shareholders. Although these companies can be found in any sector, they are particularly well represented in the consumer staples, health care, and utilities sectors. When macroeconomic conditions deteriorate, typically late in a cycle, defensive names can be ports in the storm, given that their earnings fundamentals may hold up better on a relative basis.

After Sustained Secular Growth Leadership in 1H 2024, Markets Became Highly Rotational in 3Q

Past performance is no guarantee of future results. Source: Macrobond. Secular growth is represented by the Nasdaq-100 Index, which is dominated by mega-cap stocks with global reach; cyclicals are represented by the Russell 2000 Value Index, which includes US small-cap stocks with lower price-to-book ratios and lower forecasted growth values, and thus more economically driven growth. And defensives are represented by the MSCI US Defensives Basket, which consists of companies within the health care, consumer staples, telecommunication services, and utilities sectors with earnings defensibility during economic slowdowns.

During the third quarter, global markets gyrated as they grappled with understanding the future paths for growth and inflation. In mid-July, inflation data showed clear signs of cooling, and interest rate cuts began to be priced into the US Treasury market. As a result, more cyclical growth names, including smaller market caps, performed more strongly than they had for some time. This trend reflected the view that with inflation under control and economic conditions still solid, interest rate cuts would catalyze an acceleration in growth.

Later in July, the pendulum swung in the other direction. Weaker economic data, including ISM manufacturing, initial jobless claims, and the non-farm payrolls report, pointed to deteriorating growth conditions and raised fears that central bank policy easing would not come fast enough to avoid a contraction. This rotation was exacerbated by the so-called “yen carry trade unwind” as the Bank of Japan announced an interest rate hike, which caused a liquidation of the popular strategy of borrowing in yen to buy, in many cases, large capitalization of US growth stocks. US election dynamics and Middle East unrest undoubtedly contributed to the rotational volatility.

During September, economic data demonstrated resilience and market leadership returned to the secular growth cohort. Then during the final week of the month, China made a series of broad announcements to ease monetary policy and implement fiscal stimulus to support the property market and address a deterioration in growth expectations over the past quarter. Chinese equities and global cyclically sensitive equities more broadly reacted favorably to this development and what it could mean for growth around the world.

Positioning Implications for Calamos International Growth Fund

So what does the future hold for global economic growth and what is the best way to be positioned?

We continue to favor secular growth opportunities for two reasons. First, we believe they offer the best way to compound returns for investors over the long term. Second, we think that over the shorter-to-medium term, an environment of lower and falling inflation and reasonable growth is likely to prevail.

However, the fund reflects a greater degree of balance among top-down exposures than has been the case for some time. Earlier, we noted that many potential inflection points emerged over the past several months. For the first time in many quarters, we see the probability of a transition toward either weakening or strengthening economic activity being higher, although it's difficult to have a high degree of conviction on direction. Similar to navigating autumn in Chicago—when you can use sunscreen, an umbrella, and a heavy sweater in the same week—we’ve prepared the portfolio for conditions that may change quickly.

• We maintain significant exposure to beneficiaries of growth themes, including growth in artificial intelligence and data center capital spending, healthcare innovations like GLP-1s, and regional growth stories like India.
• We have increased exposure to more defensive companies in the healthcare, telecommunications, and consumer staples sectors that we believe can deliver solid results in a weaker macroeconomic landscape.
• International equities continue to look attractive compared to US equities, and a combination of easing US monetary policy and Chinese stimulus has the potential to catalyze an improvement in economic activity and international market performance.