Global Leaders Equity Portfolio: May 2021

Summary

• With global money supply remaining very accommodative, global equities enjoyed another very positive month.
• The Global Leaders Equity Portfolio returned 3.6% with strong performances from Alphabet, Kering and Amazon.
• Looking forwards, after such a strong start to the year, the “sell in May and go away” adage might well result in initial weakness during the month, with central bank policy coming under increasing scrutiny.

Market update

The condition of easy monetary supply remains in place. During April central bank balance sheets continued to expand while corporate earnings growth was largely positive, with quarterly updates generally ahead of market expectations. All in all, this was a positive environment for equity prices and the FTSE All-World Index climbed 4.4% during the month.

The Ashburton Global Leaders Equity Portfolio returned 3.6%. April was a busy month for corporate earnings and the portfolio benefited from good stock selection in the Communication Services and Consumer Discretionary sectors. Unsurprisingly, the best performing stocks held in the month were those that reported results considerably ahead of excess of market expectation: Alphabet (+16.5%), Kering (+16.0%) and Amazon (+12.1%).

Alphabet grew its revenues 34% and continues to see a broad-based return of advertising on the Google search engine, from retail and travel companies. The company also disclosed more detail on their cloud services which, though still loss making, saw 46% growth. Kering is also seeing strong trading across brands especially in China and the USA. We envisage the runway for growth and expect that the strength of the Gucci brand will be underestimated by the market. Amazon’s results surprised positively, with increased profitability coming from the International (non-USA) based business.

The worst performers held during the month were Ping An (-6.3%), NXP (-4.4%) and  Shell (-3.4%). All three companies also reported quarterly results during the period. While Ping An has returned to growth, as previously guided the company took a large impairment on its investment in a Chinese property developer. Such impairments tend to be regarded as one-offs by equity investors, however in this case investors appear to be questioning whether the company is actually being used as an instrument of the state and are wondering if these sorts of investments might become a recurring theme. Indeed, the company took a large stake in Peking University Founder Group near the month end. We will endeavour to determine the merits of this.

NXP produced a record set of results, a little ahead of consensus estimates, however their share price fell on the announcement by Intel that they would begin to manufacture automotive chips to help with the global shortage. Our understanding is that these Intel chips would not compete directly with those made by NXP. Interestingly, NXP management also spelled out that the firm is not price gouging customers during this period of insufficient global chip supply. Rather the company has been taking long term noncancelable orders from customers and the CEO commented that “NXP is at the early stages of a longer term, company specific, growth cycle”. We remain excited by the outlook for the company based on design wins and by the increasing chip content per vehicle”.
Buoyed by a higher oil price Shell reported very strong cash flows. The firm deleveraged to the tune of US$4bn during the quarter. Our team is somewhat surprised at the disappointing performance of the stock given that the PE ratio is now less than half that of largest peers and the firm generates a higher level of operating cash flow. Perhaps investors are waiting on the side-lines until the company reaches their targeted debt level and begins to accelerate shareholder remuneration. At the current oil price, we anticipate that this will occur within six months.

The price of equities has risen quickly from their pandemic induced lows. Many indices are back at all-time highs. The health of the consumer looks good and data generally points to economic recoveries. Naturally then, investors start to wonder when central banks will scale back and withdraw their stimulative policies. The message from the central banks continues to be “not yet”. Some share price reactions to positive results indicates to us though that parts of the market are, arguably, fully priced. This suggests that investors should increasingly seek a somewhat more cautious approach to assessing the attractiveness of potential investments. We believe that the “quality growth at a reasonable price” approach employed by the Ashburton Global Leaders Equity strategy is therefore a sensible one at this juncture.