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Summary • A second wave of COVID-19 cases across the US and Europe has increased investor nervousness, alongside uncertainties around the US election and Brexit negotiations. • Earnings have been largely better than expected, although share prices within defensive sectors such as pharmaceuticals and staples have lagged, partly due to pricing pressures which may be introduced by a new US president. • Communications and consumer sectors led the way while, once again, the energy sector saw renewed pressure on the emergence of higher COVID-19 infection rates and a lack of action to curtail oil supplies by OPEC. Market update Global equity markets continued to decline in October with the FTSE All World Index falling 2.5%. A second wave of COVID-19 infections resulted in increased numbers of lockdowns being reintroduced in European countries. Infections in the US continued to climb, though election campaigning continued apace. During the month, mega capitalisation stocks underperformed smaller companies, this was particularly true in the US where market expectations of a Democrat win were thought to make these more favourable. Traditional value-based stocks also generally performed better than stocks trading on higher multiples. The Global Equity Growth portfolio (USD) declined by 1.9%. At a stock level, Tencent, Alphabet and NXP Semiconductors were the best performing stocks held. Tencent, a 4.7% position, returned more than 15% during the month. The company’s weekly sales grew 20% towards the end of the month, driven by the release of new hit ‘Moonlight Blade’ and increased interest in ‘Peacekeeper Elite’ due to the launch of an esports event. Investor interest in Tencent was also likely sparked given more information being made public on payment platforms in China in the run up to the Ant Financials initial public offering, which was ultimately withdrawn. On several measures Tencent’s Tenpay (including WeChat Pay) is only a little smaller than Ant Financial and has close to a 40% market share of the mobile payment market. Alphabet gained 10.3% during the month, having reported sales growth of 15% and operating profit of 22%, both ahead of consensus estimates. This was due to a faster-than-expected recovery in advertising spend since August. While the US Department of Justice recently cited the firm in an anti-trust case, the company looks set to argue that Google provides consumers with significant choice. Third-party reports are that the firm may have to disentangle such things as automatic selection as a search engine with Apple, which is rumoured to cost Alphabet around US$10 billion a year (for context approximately 25% of net income). Having preannounced strong results, NXP Semiconductor gained 8.3%. The firm reported even more impressive figures than had been expected given a rebound in auto manufacturing and improved guidance. Mastercard, Eli Lilly and Akamai Technologies were the worst performers. The continued reduction in cross-border transactions is weighing on Mastercard, which trades on relatively high multiples given anticipated growth. The position is under review. Eli Lilly reported mixed results, but positive guidance during the month. Like most of the sector the firm saw a sizeable reduction in its share price over the month, over fears of what a new US president could herald. The premium that the US pays for drugs has been a multi-decade issue. As for other nations, however, pharmaceuticals represent around 10% of overall healthcare spend and are well known to reduce overall healthcare costs when administered properly. The lobbying power of the pharmaceutical industry in the US is not to be underestimated, given the amount of innovation the industry provides, the jobs it supports and tax revenues it provides. In the near term, the incredible efforts by the industry to provide solutions to the COVID-19 crisis may result in a halo effect around the sector. Our belief is that the eventual impact of any drug pricing pressures is likely to be more nuanced than implied by the market move in pharmaceutical company share prices last month. The Akamai Technologies share price fell throughout the month before the firm reported 11% sales growth and 19% earnings growth, which were more than 2% and 6.5% ahead of estimates, respectively. The firm continues to benefit from trends of people working more from home, increased video streaming and higher cyber-security requirements. November will be a volatile month following a closely fought US election and possible announcements of phase-three trial results of coronavirus vaccines. The team has planned positioning for a range of US election result scenarios. Based on past performance of pre-election polls the only thing we can really be sure of is a short period of uncertainty. Buckle up!
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