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Summary
Market update Global equities continued to rebound strongly in June increasing 3.2%. Technology and consumer discretionary stocks performed particularly strongly while healthcare and consumer staples lagged. The Global Equity Growth portfolio rose 4.1% for the month. June is typically a quiet month for corporate reporting and there was little to note on a stock specific basis. Performance was largely driven by the technology and consumer discretionary holdings with Tencent, Amazon, Adobe, NXP Semi and Microsoft all providing double digit returns. The portfolio benefited from favourable stock selection in other sectors too. Eli Lilly reported positive clinical trial results for breast cancer drug Verzenio. If the drug ultimately proves successful for earlier treatment, it will likely generate sales in excess of US$5 billion per annum. The portfolio had few disappointments, with the small position in Vermilion Energy being the main one. Vermilion Energy is small and trades on an extremely low valuation in comparison to long run cash generation despite exciting growth prospects. We anticipate that the share price of the holding will be more volatile than average. Explanations of the continued rally in the equity markets include governments ending lock downs, hopes of a COVID-19 vaccine being developed in the near future, and the self-perpetuating nature of bull markets with those on the side lines jumping in over “fear of missing out”. The continued rise of coronavirus cases in the United States (US) suggests that ending of their lock downs might have happened too early, despite testing and tracking tools being available. We remain hopeful of successful pivotal trials of a coronavirus vaccine soon. The United Kingdom (UK) Oxford group trial, being run by AstraZeneca for instance, should see results by the end of August. Governments and charitable bodies have taken the unusual step of mass manufacturing the vaccine, and several other potential vaccines, in advance of definitive clinical evidence. This could result in vaccination programs beginning as early as the end of September. The biggest driver of markets though, is likely the ongoing easing of money supply from the central banks who continue to pump newly created currency into the world while buying up assets. It appears this “unconventional policy” is fast becoming what appears to be the new normal. While we believe preventing problems of liquidity is justifiable, trying to prevent solvency issues sets up continued dependency of certain industries and economies on financial stimulus. One significant consequence of this monetary policy on markets is the substantial reduction in the expected returns available from non-equity asset classes. This forces investors looking for return-seeking assets, to invest into equities. In their search for greater returns on investment, a recent change in the US Federal Reserve’s (the FED’s) mandate may allow the Fed to start purchasing equities, this would be in line with policies from other central banks like the Bank of Japan (BoJ) and Swiss Central Bank, who already have policies to purchase equities in place. It would be an extraordinary move by the FED, controllers of the world’s reserve currency, and it is hard to think how such a move would assist underlying economies. These are however extraordinary times.
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