Propelled by both incredibly easy monetary policies and economies reopening, 2021 provided high returns to equity investors. The traditional equity price Santa rally delivered positive returns with the FTSE All-World index climbing a further 4.2% during the month of December. The month saw outperformance of the value-based style.
Several companies held in the Global Leaders Equity Fund produced strong returns during the month. Following a decline in November, Visa’s share price rebounded with expectations that travel restrictions due to Omicron may be short lived. Novartis shares climbed 11% following the announcement of plans to dispose of their shares of Roche and launch a US$15bn buyback (~7% of market capitalisation) with the proceeds. Relief surrounding news on the severity of the Omicron variant also helped improve expectations for medical device sales for elective procedures and accounted for J&J shares gaining 9.7%.
Within the fund, Adobe was a major disappointment during the month declining 16%. 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 and the position was sold. Alibaba shares continued to decline following the lower guidance provided in November with news around the difficulties Chinese companies are likely to face to maintain US listings in the long term, and an expression of displeasure from some Government departments at the cadence of the company’s disclosure of security weaknesses in third party cloud applications. The company’s analyst day was held mid-month spelling out a leadership transition and growth markets. This was received positively by investors and some recovery in the share price was seen. Nonetheless, the shares ended the month 6.9% lower. With Chinese credit conditions improving and the low rating of Alibaba shares we continue to view the stock as attractive.
Thankfully data suggests that the Omicron variant 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 elevated market multiples and identification of substantive trends and defensive business models.
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