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Global Equity Growth Portfolio: June 2021

As anticipated the global equity market had a somewhat more volatile month but the FTSE All-World Index finished 1.6% higher. In line with forecasts, and high frequency data, inflation showed a strong rise. The pace of central bank asset purchases is reducing but they continue to add fuel to the heating equity market. Higher levels of inflation tend to result in growth equities being less in favour than their value counterparts. Investors factoring in modestly higher discount rates typically results in reduced assessments of value for higher growth companies in comparison to lower growth companies trading on lower multiples. The Global Equity Growth Portfolio returned +1.4% in May.

Trading activity was limited during the month.

During the month the portfolio’s best performers were Shenzhou +17.4%, Morgan Stanley +10.2% and NXP Semi +9.8%. Shenzhou’s new facilities in Cambodia and Vietnam are performing well with the company managing to hire workers ahead of expectations. Rising automation is improving productivity and capacity utilisation is strong.  We continue to monitor the outbreaks of COVID-19 in these countries which could curtail manufacturing activity. Morgan Stanley shares fared well over the month providing performance a little superior to similar peers. The company unveiled a reshuffle of their executive team with staff from the investment and wealth management side of the business being given promotion. This supports our thesis of continued growth and emphasis on wealth and asset management.

The worst performers were Lancashire -8.2%, Alibaba -7.4% and Axon -7.3%. Despite continued positivity surrounding insurance rate increases Lancashire, along with the rest of the speciality insurance sector, saw a reduction in share price over the month. Alibaba reported a loss for the full year due entirely to the known anti-competitive fine of US$2.8bn. For the year the firm saw revenue growth of over 40% and, excluding the fine, net income growth of over 30%. Whilst recognising that the firm will face increasing scrutiny in future the valuation continues to look compelling given the expected growth profile.

Our central case continues to be that the rise in inflation is transitory and that we will see lower inflation later this year. If we are wrong and inflation is found to be stubbornly high, then central banks would likely be forced to raise interest rates. This would likely result in a risk-off environment. Earnings growth for equities generally looks impressive however some caution is required in extrapolating this too much given the unusual comparative base effect of last year’s pandemically induced low earnings for many companies. Given current valuations, looking forwards returns from equities ought to be more modest, and will likely continue to show a high level of volatility.