As expected, the Federal Reserve Chair announced that interest rates will remain at zero and the current rate of bond purchases will continue until a reduction is justified by stronger economic data. Meanwhile the dot plot of future interest rate expectations by Federal Reserve Board members indicated a faster rate of interest rate rises than the market had anticipated.
There was however much to fear during the month with concerns over the US debt ceiling and the terminal decline of Chinese property developer Evergrande. Our expectation is that agreement on the debt ceiling will be reached in short order and before 18 of October when Janet Yellen, secretary of the treasury, predicts that the USA would otherwise run out of money. The Chinese government will be keen to prevent any contagion from the failure of Evergrande and there have been considerable monetary injections locally to maintain sufficient liquidity in the insulated Chinese financial system.
Disappointingly given the market decline and the pattern of performance, the Global Leaders Equity Fund underperformed the market during the month falling 6.5% (I class USD). The best fund contributors were Lloyds Bank +4.2%, Reckitt Benckiser +3.1% and AstraZeneca +3.1%. The worst were Adobe -13.3%, Alibaba -11.3% and Eaton -11.3%.
Lloyds bank shares performed well rising 4.2% as the UK economy continued to progress with lockdowns ending. Quarter on quarter GDP growth was recorded at 5.5%, above the survey level of 4.8%. Towards the end of the month however supply chain issues have arisen once more for the country. Some of these mirror those seen globally, such as lack of semi-conductor chips, but many others relate to a shortage of qualified heavy goods vehicle drivers. The shortage has arisen due to a lack of training and testing of new drivers due to COVID restrictions, and also due to Brexit making for an unwelcome environment for EU workers. This is unlikely to be resolved in short order which could herald some reduction in UK GDP estimates.
Reckitt Benckiser shares saw some recovery, with management indicating current trading was in line with management expectations and outlining the company’s transformational progress and opportunities in e-commerce.
AstraZeneca continued to deliver successful clinical trial data during September. Data from the firm’s trial of Enhertu showed unprecedented efficacy in their DESTINY breast cancer trial for second line treatment of HER2 positive patients. The drug could generate peak annual sales of over US $10bn if it was to be used in earlier settings. Despite the share price reaching a 52-week high, in our opinion, AstraZeneca remains one of the most attractive pharmaceutical shares giving a well-diversified derisked, growing product portfolio with long patent protection.
Despite reporting results and guidance ahead of consensus, Adobe was the worst performing holding during the month with shares falling 13.3%. Perhaps there was concern in some quarters over the slightly lower than anticipated digital media revenues. The business continues to establish broader footprints within customers and expansion into mobile systems presents further runway for growth. The firm trades on relatively high multiples but we believe this is justified given a free cash flow yield of just over 2% and growth in excess of 20% per year.
The continued weakness from Alibaba shares is, we believe, largely unreflective of business fundamentals. According to the National Bureau of Statistics of China, monthly on-line retail sales in the country continued to climb a further 14% during August. The annual consensus estimate of 18% growth for the calendar year looks to be a little below the year-to-date industry growth seen so far this year of 20%. Our expectation remains that the entrenched market positioning of Alibaba means that, despite a likely increased tax burden, the company is well positioned to navigate additional regulatory measures. This assumes however, that the government is not intent on destroying what is regarded as a global leader in ecommerce and technological advancement.
Eaton shares declined with management indicating that, after a fantastic first half of the year and strong end market demand, raw material and labour shortages could begin to impinge on short term results of the Electrical Americas segment. Longer term growth expectations remain intact.
The team tests the investment cases of stocks we hold remain valid and this is particularly the case when share price performance of holdings in unsatisfactory. Short term setbacks in the share prices of some wonderful companies that compound intrinsic value such as Adobe and Eaton are frustrating while our analysts still see upside to valuations, however, are part and parcel of active management. Form is temporary, class is permanent.
As outlined last month, the fund’s exposure to China has been particularly unhelpful given the shock and awe that has resulted from the introduction of certain government policies. On a fundamental basis many Chinese stocks look particularly attractive while sentiment is extremely negative. The risk of investing in the nation is clearly elevated given recent government behaviours, we await further signals from the state to determine when the time may be right to increase exposures to the nation again.
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