After their small dip in January, global equity markets continued to climb higher in February. There is growing confidence that vaccines will end economic lockdowns and there will be a return to trend growth in many countries. Traditional value stocks, indebted stocks and smaller capitalisation companies performed particularly well. Some of this move is due to relief that economic conditions are expected to improve. Much of this move can be also be accounted for by changing expectations of monetary policy. A prolonged rise in inflation would force central banks to raise interest rates. The great inflation debate is on-going, and the truth is that no-one knows for sure what will happen. If there was one economic variable that the Ashburton Investment team would like to know for long term investment, it would be the inflation outlook. On the one hand, with close to a quarter of all US dollars in existence created by the Federal Reserve in just the last year, some economists confidently predict inflation. On the other hand, some economists argue that both technological advancements and the massive reduction in money circulation have huge deflationary effects. As President Truman once reportedly said “Bring me the one-handed economist”. Only very few have predicted hyperinflation, given that confidence in central banks appears to be solid.
While new variants of COVID-19 threaten to come down the track, the light at the end of the pandemic tunnel is looking much closer for citizens of countries with advanced vaccination programs. Israel, the UAE and the UK lead the way on this front. Data from Israel and a recent publication from Public Health England indicates the massive reductions in COVID-19 cases and hospitalisations as a result of vaccine programs.
The best performers held during the month were Lloyds Bank (+20.4%), JP Morgan (+14.4%) and NXP Semiconductor (+13.8%). February saw a steepening of the yield curve, that is favourable for banks along with positive news about the speed of vaccines roll outs in the UK and USA. NXP Semiconductor has been a beneficiary of a global chip shortage, leading to expectations that the company will be able to raise prices. The position in Lloyds Bank was increased and that in NXP Semiconductor was trimmed.
The worst performers held during the month were Unilever (-9.3%), Nestle (-6.7%) and Alibaba ( -6.3%). Exposure to consumer staples has been slightly reduced. Unilever disappointed investors on reported margins though maintained guidance, while despite Nestle’s encouraging results their share price also declined.
During the month, a new holding was established in Eaton. The company holds a dominant position in the USA in many segments of electrification. The firm is set to benefit from secular trends in the electricals industry, including increased investment in sustainability infrastructure, increased connectivity and increased electrical content. The firm has recently launched a digital platform, Brightlayer, which should result in increased sales opportunities.
We do not believe that the prolonged positive outlook for growth has yet been factored into consensus forecasts, nor the current share price.
Pharmaceutical giant Merck was sold. The increasing concentration on wonder drug Keytruda, set to become the world’s best-selling drug, has some echoes of Pfizer in the years that ran up to the patent expiry of the worlds previous biggest ever selling drug Lipitor. During this period, despite trading on very low share price multiples Pfizer shares materially disappointed. While Merck is a high-quality company trading on a low multiple, the Ashburton Investment team was conscious that this could be something of a classic “value trap”. The compelling case to add Eaton to the Fund meant that with a 25-stock maximum holding limit that something had to be sold.
There are signs of market excess perhaps in part due to increased retail participation and gamification of investment. The Fund has been tilted towards sectors of the market that should benefit from a cyclical upswing while selecting stocks that we believe to be undervalued.
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