Global Leaders Equity Portfolio: July 2021

Summary

• Global liquidity remains high, and global equity markets continued to climb during June.
• The Global Leaders Equity Portfolio returned 0.7% a little behind the FTSE All-World Index return of 1.2% though broadly in-line with the EAA Fund Global Large-Cap Blend Equity peer group return of 0.5%.
• The position in Royal Dutch Shell was sold and a new position taken in TSMC. 

During the month headline inflation in the United States reached over 5% for only the second time in 30 years. Financial conditions remain at their loosest levels in over 40 years. With this backdrop global equities continued to increase in price. The US stock market again reached all-time highs.

Within the portfolio technology and consumer discretionary stocks had a strong month. Adobe returned 16%, Microsoft 8.5% and Amazon 6.7%. Financial holdings performed relatively poorly with Ping An -10.0%, Lloyds Bank -9.0% and JP Morgan -5.3%.

Trading activity was elevated during the month:

The decision to sell oil giant Royal Dutch Shell has been brewing within the team for some time. During the month a district court in the Netherlands ruled that the company must cut net carbon emissions by 45% by 2030 compared to 2019 levels. These targets are significantly more aggressive than those previously outlined by the company. Part of our global quality framework is a view on sustainability of business models. The accelerating pivot away from being a hydrocarbon company is exciting. Returns on capital offered by alternative technologies at this stage appear to be relatively low and seem unlikely to exceed the cost of capital we consider for the company. The company has seen its share price increase substantially from pandemic induced lows.

A new holding was established in Taiwan Semiconductor Manufacturing Company (TSMC). The company is a third-party manufacturer of semiconductor chips with leading edge technology and huge barriers to entry. The outlook for utilisation is favourable in the short term for commodity production of more simple chips while the company enjoys a comfortable duopoly pricing at the lowest node sizes. The long-term outlook for semiconductor chip demand is favourable with increasing numbers and complexity of chips with various end uses.

In order to balance the portfolio in line with our macro-economic sectoral outlook, the weighting to Microsoft was reduced and J&J was topped up.

We continue to believe that a more material recovery is expected on a full-year basis as precautionary savings unwind, and as economic activity recovers off a low base. As vaccines continue to be rolled out, and lockdown restrictions continue to be lifted we anticipate further positive economic news. Inflation is likely approaching its peak and is expected to slow in the second half of the year. While talks of tapering by the Fed are expected to commence in the second half of the year, we believe that monetary policy will likely remain largely accommodative and that any reduction in liquidity from the central bank will be gradual. With market valuations elevated, forward looking long-term expectations of equity market returns are more moderate and come with higher volatility. Buckle up!