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QTD International Equity – 2Q2026 vs MSCI EAFE

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Market Observations & Portfolio Commentary

International Equity – 2Q2026 vs MSCI EAFE

 

Market Update

Global equity markets opened 2026 on a volatile note, as geopolitical shocks and shifting rate expectations reversed last year’s momentum. The MSCI ACWI declined 3.2% for the quarter, reflecting a broad pullback in risk appetite. In the U.S., the S&P 500 fell 4.3%, weighed down by a sharp March correction. International Developed and Emerging Markets entered the period with stronger momentum through February, enabling relative outperformance for the full quarter despite a more severe March selloff. The MSCI EAFE finished down just 1.2%, even as the U.S. Dollar’s flight-to-safety rally turned currency movements from a 2025 tailwind into a headwind. Emerging Markets proved most resilient, finishing nearly flat at -0.2%, supported by commodity-exporting regions.

Macro conditions were increasingly shaped by the Middle East energy shock. The EU held rates steady, the Bank of England paused its easing cycle, and the Bank of Japan halted hikes while reaffirming its normalization path. Yield curves steepened broadly as inflation expectations rose. China remained mixed with stabilizing unemployment offset by weak industrial production and an unresolved property sector.

Within the MSCI EAFE, sector performance was sharply bifurcated. Energy surged +40.1% on rising crude prices, while Utilities and Materials also benefited from commodity tailwinds. Consumer Discretionary fell 14.6% on inflationary pressure, and Financials declined 3.5% amid stability concerns. On the factor side, Value, Yield, and Size were positive contributors; Volatility was a headwind; and Growth, Quality, and Momentum produced mixed results.

 

Key Performance Takeaways

  • The International Equity portfolio returned 10.1% (9.9% net) during the quarter vs a 10.8% gain for the MSCI EAFE Index. Sector exposure was a contributor to relative performance, partially offset by stock selection

  • The International Equity portfolio trailed its benchmark but captured approximately 93% of the index’s gain, exceeding our 85-90% upside capture expectations. Index returns continue to be driven by lower-quality, higher-beta factors — the same dynamic that’s challenged the strategy’s quality orientation over the past year. Against this backdrop and in a quarter when the market compounded at double-digit returns, we were encouraged by the portfolio’s improved relative performance in the second quarter. We believe our discipline around business quality and valuation supports downside protection and compelling risk-adjusted returns over full market cycles.

 

Top 3 Contributors to Relative Performance 

  • Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM) – TSM shares rose sharply during Q2, continuing to benefit from attractive demand fundamentals as AI-driven investment accelerated. TSM maintained its upgraded revenue outlook after consistently exceeding sales expectations in prior quarters. Its dominant position and favorable exposure to structural growth remain attractive.

  • ICON, PLC (ICLR) – ICLR shares rallied during Q2 recovering sharply from first quarter weakness following the completion of the internal investigation into its revenue recognition policies. Earnings updates demonstrated commercial momentum and strong competitive positioning in a stabilizing demand environment. Valuation remains compelling.

  • InterContinental Hotels Group (IHG LN) – IHG LN shares rose sharply during the quarter as de-escalation in the Middle East eased macro concerns that had weighed on travel-related stocks earlier in the year. Underlying travel demand remains resilient, supporting healthy RevPAR trends and continued net unit growth. We remain attracted to IHG LN’s asset-light, fee-based model, strong free cash flow generation, and consistent return of capital to shareholders.

 

Top 3 Detractors from Relative Performance 

  • Nintendo Co Ltd (7974 JP) – Nintendo’s stock has been pressured this year by rising memory chip costs, a key input for its hardware. In response, the company will raise the price of the Switch 2 console in September, raising fears that price elasticity could weigh on the installed base after a very strong first year for the console. We believe hardware demand will be less elastic than the market anticipates, and that cycle profits will be predominantly driven by associated software sales, box office receipts, and other monetization efforts in the years to come. Cash on the balance sheet equal to roughly 27% of market cap provides downside protection.

  • BAE Systems PLC (BA/ LN) – BA/ LN shares declined during the quarter, giving back a portion of the first quarter’s gain as the ceasefire in the Middle East weighed on sentiment across the defense sector. Sentiment around defense names shifts quarter-to-quarter with geopolitical developments, and we expect that volatility to continue. Our long-term thesis is unchanged: defense spending growth remains well supported across NATO member countries over the coming decade, with BA/ LN well positioned to benefit.

  • Willis Towers Watson, PLC (WTW) – Shares of WTW were down in Q2 after bracketing its Risk & Broking segment growth outlook toward the lower end of its prior range. Negative sentiment centered on AI-driven disintermediation also weighed on the sector. We continue to see evidence of improving growth, margins, and free cash flow generation, and believe AI represents more of a margin expansion opportunity than a competitive threat for WTW. Valuation remains attractive and supports downside protection.

 

Sector Influence

We are bottom-up stock pickers, but sector exposures influenced relative performance as follows:

  • What Helped: Underweight Energy (the weakest performing sector) & overweight Information Technology (the best performing sector)

  • What Hurt: Underweight Financials (a better performing sector) & overweight Consumer Staples (a weaker performing sector)

 

Trades During the Quarter

  • Exited: Burford Capital Limited (BUR) – BUR lost its appeal in the case against Argentina, an outcome we had judged as unlikely. Given this change to our investment thesis, we sold the position and redeployed the capital into holdings where we have higher conviction and better risk/reward.

  • Increased: RELX PLC (REL LN) – We view the company’s shares as attractively valued, offering a favorable risk/reward.

  • Increased: Willis Towers Watson, PLC (WTW) – We view the company’s shares as attractively valued, offering a favorable risk/reward.

 

Looking Ahead

As we enter the second half of 2026, the macro backdrop has shifted from geopolitical shock to policy response. While the ceasefire in the Middle East has eased the immediate pressure on energy prices, central banks abroad have made clear they are unwilling to look through the inflationary effects of the shock, with the ECB and Bank of Japan now tightening alongside a more hawkish Federal Reserve. Whether this synchronized shift proves to be a brief adjustment or the start of a more sustained tightening cycle will likely shape markets in the second half of the year, and we would not be surprised to see renewed volatility as investors recalibrate. As always, our strategy remains unchanged. We continue to look past short-term noise, focusing on long-term fundamentals and assuming modest economic growth as we select companies from the bottom up.

Within equities, we continue to find attractive opportunities abroad trading at reasonable valuations and significant discounts to the U.S. Market leadership over the past several quarters has swung from one extreme to another, moving from energy and defensive names amid conflict to speculative, higher-beta names on de-escalation, while a narrow group of lower-quality companies has continued to drive index returns. We do not view this leadership as sustainable. Rising rates and tightening financial conditions have historically favored companies with pricing power, durable cash flows, and strong balance sheets, precisely the characteristics we seek. While timing the reversal of this trend is impossible, we believe our approach can serve as an important ballast and a valuable diversifier for portfolios going forward.

 

Annualized Returns 

As of 6/30/2026

International Equity - 2Q2026 vs MSCI EAFE

Inception date: 9/30/2023. Performance is preliminary. Subject to change. Past performance should not be taken as a guarantee of future results. Net of fee returns are calculated net of an annual model management fee of 0.75%. Please see the disclosure notes found on the bottom of the page.

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Disclosure Notes

 

The London Company’s performances are size weighted and annualized based on calculations for the period ending June 30, 2026. The characteristics discussed herein relate to a representative account, and not every client’s account will have these exact characteristics. As London manages its client portfolios according to each client’s specific investment needs and circumstances, London cannot affirm that the characteristics of the account shown are similar to all accounts participating in the strategy. This is due in part to the timing of trades by the Advisor, market conditions, cash availability, and the timing of client deposits and withdrawals. Therefore, prospective clients should not assume that similar performance results to those shown would have been achieved for their accounts had they been invested in the strategy during the period. None of the information contained herein should be construed as an offer to buy or sell securities, or as investment recommendations.

 

Definition of Firm: The London Company of Virginia is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about the advisor, including full descriptions of its investment strategies, fees and objectives, can be found in the firm’s Form ADV Part 2, which is available upon request by calling 804.775.0317 or visiting www.TLCadvisory.com. The London Company claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Please visit www.TLCadvisory.com or contact us at 804.775.0317 to request a complete list and description of The London Company’s composites and/or a GIPS® Report that adheres to the (GIPS®) standards.

 

Composite Creation/Inception Date: September 30, 2023

 

Composite Definition: The International Equity strategy invests mainly in conservative, low-beta international equities with a focus on above-average downside protection. Primarily, we seek profitable, financially stable companies that consistently generate free cash flow, sustain high returns on unleveraged operating capital, trade at significant discounts to their intrinsic values, and are run by shareholder-oriented management. Positions are usually within the market capitalization range of the major, international indices. Accounts in this product composite are fully discretionary taxable and tax-exempt portfolios with a minimum of $500,000 in assets. Prior to 7/1/2024 the minimum portfolio size was $100,000. The product is measured against the MSCI EAFE Index (Net) and has a creation and inception date of September 30, 2023. There is no use of leverage, derivatives or short positions. All actual fee-paying discretionary portfolios are included in one or more composites that have been managed for a full calendar quarter with limited restrictions and similar objectives. Investing in global/international markets involves risks not associated with U.S. markets, including economic, political, and currency fluctuation risks. The TLC International Equity product may contain companies domiciled in the U.S., but have a business mix that is predominantly international.

 

Benchmark Description: The MSCI EAFE Index (Net) measures performance of large and mid-cap securities across developed markets around the world, including countries in Europe, Australia, Asia, and the Far East, excluding the U.S. and Canada. It includes over 900 securities, and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. Benchmark returns are shown net of withholding taxes. Benchmark returns are not covered by the report of independent verifiers. Any referenced international index is presented net of foreign withholding tax, unless stated otherwise.

 

Performance and Fees: Gross of fee returns are calculated gross of management and custodian fees and net of transaction costs. Net of fee returns are calculated net of an annual model fee of 0.75% and transaction cost and gross of custodian and other fees. The 0.75% model London Company management fee applied is the highest tier of the current composite fee schedule. This fee is applied monthly to the gross return at 1/12th the annual rate, which is 0.0625% per month. Actual investment advisory fees incurred by clients may vary. Returns may be net of miscellaneous fund expenses. The gross figures do not reflect the deduction of investment advisory fees. Returns are calculated and stated in U.S. dollars. Composite performance is calculated net or gross of foreign withholding taxes on dividends and interest income dependent on custodian data. Dividends are reinvested. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.

 

Past performance should not be taken as a guarantee of future results. The report is for informational purposes only. Data, while obtained from sources we believe to be reliable, cannot be guaranteed, and all statistics are subject to change. The statements contained herein are solely based upon the opinions of The London Company and the data available at the time of publication of this report, and there is no assurance that any predicted results will actually occur. Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell any specific securities and should not be considered investment advice of any kind. An investment in a London Company strategy is subject to risks, including the loss of principal. Referenced strategies may not be suitable for all investors. The appropriateness of a particular strategy will depend on individual circumstances and objectives. In making an investment decision, individuals should utilize other information sources and the advice of their investment advisor.

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