Global Equity Growth Portfolio: March 2021

Summary

• Global equity markets rose in February with the FTSE All World Index returning +2.4%. The Global Equity Growth Portfolio returned +1.9%
• A steepening yield curve and confidence in an economic rebound due to successful vaccination programs saw some rotation in market leadership, with traditional value stocks, indebted companies and smaller capitalisation companies performing particularly well.
• Within the Portfolio a new position was established in Lancashire, a specialist insurance company set to benefit from rising insurance rates. Shenzhou was trimmed.

Market update

After a small dip in January, global equity markets continued to climb higher in February. There is growing confidence that vaccines will end economic lockdowns and that there will be a return to trend growth in many countries. Traditional value stocks, indebted stocks and smaller capitalisation companies performed particularly well. Some of this move is due to relief that economic conditions are expected to improve. Much of this move can be also be accounted for by changing expectations of monetary policy. A prolonged rise in inflation would force central banks to raise interest rates. The great inflation debate is on-going, and the truth is that no-one knows for sure what will happen. If there was one economic variable that the Ashburton Investments team would like to know for long term investment, it would be the inflation outlook. On the one hand with close to a quarter of all US dollars in existence created by the Federal Reserve in just the last year, some economists confidently predict inflation. On the other hand, some economists argue that both technological advancements and the massive reduction in money circulation have huge deflationary effects. As President Truman once reportedly said “Bring me the one-handed economist”. Only very few have predicted hyperinflation, given that confidence in central banks appears to be solid.

While new variants of COVID-19 threaten to come down the track, the light at the end of the pandemic tunnel is looking much closer for citizens of countries with advanced vaccination programs. Israel, the UAE and the UK lead the way on this front. Data from Israel and a recent publication from Public Health England indicates the massive reductions in COVID-19 cases and hospitalisations as a result of vaccine programs.

The best performers held during the month were Vermilion Energy (+43.7%), NXP Semiconductor (+13.8%) and the recently added commodities exposure from the MSCI Metals & Mining ETF (+13.8%). The strategy has a very low weighting to the oil sector with only one small holding. This holding’s leverage to the oil price can be seen by the dramatic move in Vermilion Energy’s share price last month. NXP is benefiting from a global chip shortage and expectations of increased pricing, while the base metal producer’s ETF saw good gains given a depreciating USD and broad-based analyst upgrades within the sector.

The worst performers held during the month were Akamai (-14.9%), Kerry (-10.8%), and Alibaba ( -6.3%). The position in Akamai is under review. Having seen brilliant demand during the year, the valuation looks a little stretched and there are fears that competition might erode some of the barriers the company has. Kerry came under attack from a short seller report on historic acquisition accounting that we believe has no merit.

During the month a new holding was established in specialist insurance company Lancashire. The firm has a reputation for superb capital management in playing the specialist insurance pricing cycle. Opportunistically the firm recently raised capital in order to benefit from attractive insurance rates. The portfolio purchased at a lower price than this capital raise was conducted.

There are signs of market excess perhaps in part due to increased retail participation and gamification of investment. The portfolio continues to seek companies with attractive earnings growth prospects but to avoid those companies whose shares trade on unjustifiable multiples.