L1 Capital International Strategy Update March 2026

Global Equity Pressures

Global stock markets entered 2026 with resilience, but February brought choppy conditions. Small caps and emerging markets led gains in January, with the Russell 2000 up 5.4% versus the S&P 500's 1.5%. This shift reflected falling short-term rates aiding borrowing and a pivot from mega-cap tech to cyclical, domestic sectors. Yet, geopolitical flashpoints in Iran and Ukraine, plus trade tensions, triggered sharp drops, like the S&P 500's 2.1% fall on January 20 after new tariff announcements.

L1 Capital's International Fund, benchmarked against the MSCI World Index, posted a 7% loss in January, trailing the index's 2.7% decline. Over three months, it fell 8%, versus the benchmark's 3.4%. This underperformance highlights pressures on global equity strategies amid currency fluctuations and sector rotations. Longer-term, the fund has matched or slightly beaten the index over three years, with 19.6% annualized returns, but recent weakness underscores sensitivity to AI-driven volatility and policy shifts.

Real-world impacts ripple through investors and economies. US tariffs, expected to persist, could slow global trade, denting corporate profits by up to 0.3% in affected sectors. In Europe, Germany's $1.3 trillion package for military, infrastructure, and green energy aims to counter this, potentially boosting defense stocks by 4% of GDP by 2035. Emerging markets, up 8.8% in January, face uneven growth, with Kenya projecting 5.4% GDP rise in 2026 from infrastructure, while Argentina attracts $30 billion in mining investments under new incentives.

Stakes are concrete: Nvidia's February 26 earnings, forecasted at 57% year-over-year growth, could move markets by 2-3% if missed, given its index weight. Deadlines loom with US-Iran talks in March, risking oil spikes—WTI crude averaged 1.6% February gains historically but surged last month on tensions. Costs mount as inflation lingers above targets, with US rates paused, eroding returns. Inaction risks missing rotations; funds ignoring small-cap rebounds could lag by 4-5% quarterly.

Non-obvious angles include tensions between short-term AI optimism and structural instabilities. While AI capex supports growth, disconnects arise—US recession odds at 35%, yet fiscal boosts like Trump's policies could add 0.6% to GDP. Trade-offs pit resilience against fragmentation: Sanctions speed financial stress, but private adaptability offsets. Surprising data shows VIX volatility up 5.5% on average in February, signaling unpredictable spikes despite steady 3.3% global growth forecasts.