Summary 

• After reaching new all-time highs towards the beginning of the month, global equity returns turned negative in September with the global index finishing 3.5% lower. This marked the first monthly fall in equity markets since the height of the pandemic lockdowns in March
• The Global Leaders Fund (I class USD) declined 4% over the month
• New positions were added in Alibaba Group and Kering Group, while the holding in CK Hutchison was sold.

Market update

The US Federal Reserve’s (the Fed), continued expansionary monetary policy even in the face of potential inflation, foreshadowed at the Jackson Hole meeting, was reaffirmed with the Fed retaining zero interest rates and forecasting them to remain at this level until at least 2023. The Fed chairman highlighted the need for fiscal measures to support the US economy. Optimism over such a fiscal package triggered a month end equity rally. European Central Bank’s (ECB) president, Christine Lagarde, indicated at the end of the month that the ECB will follow suit in allowing inflation to rise unchecked for a period without raising interest rates. 

As we wrote last month, in the long term, these policy moves are likely to continue to favour equities of companies with high growth prospects. The Fund was tilted to position for this with two new purchases of higher growth companies, Alibaba and Kering, and the sale of a more value-oriented name CK Hutchison. Reckitt Benckiser was trimmed after a period of strong performance.

Alibaba was the fund’s best performer in the month and is one of the world’s preeminent e-commerce and technology companies, with shares offering exposure to high growth on a considerably lower multiple than global peers. The firm’s three-day investor conference at the beginning of October ought to provide greater visibility into the novel businesses it has and the long-term prospects for these. We believe the outlook for the cloud business to be particularly promising and, we hope, it will remain on a similar path to that enjoyed historically by Amazon Web Services.  Formerly known as Ant Financial, 33%-owned payments affiliate Ant Group looks set to have a major initial public offering in the coming months.

Kering, the luxury goods company with brands including Gucci and YSL, has seen encouraging growth over the last few years and has been successfully moving into on-line retail. Gucci continues to grow ahead of the luxury goods market and has an enviable position in mainland China. While the brand is well known for flamboyant style, the global equity team is comfortable with the inherent fashion risk given that over 70% of sales come from core products, repeated year after year.

Since purchase, CK Hutchison has proved something of a disappointment. Some of our original investment case is playing out with, for instance, third party analyst net asset value (nav) estimates now including the telco tower assets. The gap however, between the share price and this nav has widened further rather than close. Now trading on a trailing P/E ratio of around five times, the company seems incredibly cheap. Value based investing requires some catalysts to unlock value. While there are several identifiable ones, the environment does not seem favourable for the company to realise some of these in the next few years (e.g. listing Watson’s the world’s biggest health and beauty retailer).

During the month Samsung reversed much of the previous month’s underperformance, while Unilever also performed strongly. Alphabet, Shell and BP were the worst performers. Alphabet recently hosted a launch event outlining their line-up of new hardware devices; it’s likely it will be a rebound in search revenue, on the back of a COVID-19 driven increase in corporate advertising across the various platforms, including YouTube, Google Search and Cloud, that results in better share price performance. The two oil names, now comprising in total less than 4% of the fund, have been under review and both holdings plan to transform into energy companies in the longer term, yet their intrinsic value is likely to continue to be determined by the oil price in the medium term. OPEC supply constraints imply that elevated inventory levels continue to fall and recovering demand ought to mean a return to a higher oil price. In the medium term, the huge reduction in drilling and exploration activities will mean a more sustained supply constraint and drive higher prices. 

There is no disputing that relative to history equity market multiples are high. Though there is still some way to go to reverse the Covid lockdown induced economic damage, we continue to forecast economic improvement from the currently depressed levels. While monetary policy remains so lax, even in the face of inflationary pressures as economies unlock, it is difficult to see how other asset classes can deliver real returns. Corporates tend to be relatively well shielded from inflationary pressures given their abilities to pass on price rises. Catalysts for economic recovery may come from vaccine announcements or from fiscal stimulus. We continue to seek reasonably priced quality companies by which we mean those with sustainable barriers to entry, generating economic profit, strong balance sheets, good shareholder treatment and barriers to entry. These ingredients ought to continue to provide good risk adjusted returns.