• The Global Equity Growth Portfolio (USD) returned 2.1% during the month, against the global index return of 4.2%, (FTSE All-World).
• Evidence suggests that the Coronavirus Omicron variant helped drive the market higher.
• Adobe provided a somewhat disappointing outlook during the month and the position was sold.
Several companies held in the Global Equity Growth Portfolio produced strong returns during the month with seven holdings over 10%. Vermilion Energy was the top performer returning 26.6%, with prices of European gas set to increase with supply shortages and a cold winter. Wickes +13.5% and United Health +13.4%, were the next two top performers.
Within the portfolio one of the largest positions, Adobe declined 15% which provided the biggest negative contribution during the month. The company reported in line results, however guidance for 2022 was below market expectations and with the shares trading on a relatively high market multiple, this led to a derating. Half of the six percent position was sold. Argonaut Gold, a much smaller holding, provided a disappointing update on costs for their Magino mine and leadership change. The increasing cost means there is now a capital shortfall to complete the project which will transform the firm’s production base to be one of the lowest cost gold producers globally. Our conversations with the company indicate that much of the required capital will be met using Canadian Development Plan financing which tends not to cause significant shareholder dilution. Unsurprisingly, in our view based on the quality of the assets and an even lower valuation following a 30% fall in the share price, there have been rumours of acquisition interest from gold majors. After engaging with the company, the Argonaut position was increased. Following a good earnings update and a positive month in November TCS Group also declined, perhaps due to increased fears of the potential for Russia to invade the Ukraine and a possible increase in sanctions.
Thankfully data suggests that the Omicron variant of COVID-19 has continued to show to be a relatively minor risk to health which is enabling economies to open.
Looking forwards to 2022, we anticipate an initially favourable environment for global equities while liquidity is still abundant. The outlook for equity prices for the balance of the year will however be less rosy than it has been. Growth rates and inflation are both likely to decline. Household savings levels have largely returned to pre-pandemic levels and supply chain constraints have been easing. Money supply, arguably the greatest influence on equity market returns will be reduced during the year. Indications from central banks are for less supportive monetary policies with quantitative easing set to end in the USA and interest rate rises on the horizon. Mid-term US elections in November will probably herald policy gridlock with Republicans potentially blocking substantive fiscal plans from President Biden.
While monetary policy has been extremely loose, multiple expansion rather than earnings growth has been responsible for a large portion of equity returns generated by many stocks. The team continues to be focused on identifying stocks that we believe trade on a discount to their fundamental values. In the near term, this means heightened aversion to stocks trading on very elevated market multiples and identification of substantive trends and defensive business models.
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