Global Equity Income Portfolio: July 2021

Summary

  • Global liquidity remains high, and global equity markets continued to climb during June. The FTSE All-World Index climbed 0.9%.Value stocks were however out of favour in preference to traditional growth stocks and the FTSE All- World high dividend Index fell 1.5%.
  • The Global Equity Income Portfolio declined 0.8% which was broadly in line with the EAA Fund Global Equity Income peer group of -0.9% and somewhat superior to the high dividend Index.
  • Trading activity was limited with a small top up of National Grid.

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 healthcare stocks had a strong month. Microsoft gained 8.5%, Roche 8.4% and Merck 8.4%. Financial holdings performed relatively poorly with Legal & General declining -11.9%, Lloyds Bank -9.0% and US Bancorp -5.6%.

The National Grid position was increased. Our meeting with company management spelled out in more detail the increasing amount of spending that the British regulator is permitting on the electrical grid over the next five years in support of the UK becoming carbon neutral. As a result, National Grid is one of the fastest growing regulated network companies. Regulatory transparency is at an all-time high with multi-year regulatory frameworks for major assets agreed for a five-year period and include a large element of inflation pass through. Indications are that the pivot away from gas towards the electrical grid will continue. Shares offer a dividend yield of 5% while earnings growth of 5 to 7% p.a. is expected for the next five years.

We continue to believe that a more material recovery is expected on a full-year basis as precautionary savings unwind, and as economic activity returns to a normal state  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!