Summary

• During the month, the EAA Fund Global Large-Cap growth equity peer group declined  10.1%. The FTSE All-World Index declined 4.8%. The Global Equity Growth Portfolio fell 4.6%.
• The portfolio’s best performing stocks were Vermilion +23.6%, Rexel +8.5%, Ping An +8.5%.
• The biggest detractors were Ecolab -16.6%, Tinkoff -16.6% and Wickes -14.2%.

To support economies during the pandemic, central banks have used a combination of ultralow interest rates and record levels of quantitative easing. This has meant that global liquidity has been at an all-time high. The Chair of the Federal Reserve (FED), Jerome Powell, gave a speech towards the month end. This outlined plans to both raise interest rates and to reverse quantitative easing. Chairman Powell highlighted that the bank’s dual mandate is for stable prices and employment. Since the financial crisis central banks have been widely thought to have factored asset prices into their policy thinking. Indeed, in a speech in 2013 former Chairman Ben Bernanke outlined an aim of FED to “push” investors to take more risk. This has led many investors to adopt the “buy the dip” strategy feeling safe in the knowledge that a “central bank put” would step in and support financial markets.

Inflation is at elevated levels; employment is recovering, and economies have largely reopened after the coronavirus pandemic. Investors interpreted Chairman Powell’s comments as an indication that the central bank put is being withdrawn. Financial markets do have an impact on the real economy however the primary market for equities is of minimal consequence. Likely some support from central banks might take effect if high yield spreads were to increase.

During the month, the FTSE All-World Index declined 4.8%. The Global Equity Growth Portfolio fell 4.6%, which was significantly superior to the EAA Fund Global Large-Cap growth equity peer group decline of 10.1%.

The portfolio’s best performing stocks were Vermilion +23.6%, Rexel +8.5%, Ping An +8.5%. Despite strong share price performance Vermilion shares continue to trade at an attractive price, offering an expected free cash flow yield of over 40%. One of few firms qualified to purchase European gas assets as the company expanded their European Gas assets. With regional natural gas shortages, the 22% of European production is expected to generate 43% of free cash flow during 2022. Ping An remains ahead of peers in adjusting to more stringent distribution regulation in China. Property exposure is limited, and the bank’s non-performing loan ratio is improving. The company next reports late March. There are relatively few countries globally where central banks are loosening rather than tightening policy. China being one of these, and credit conditions in the country have begun to improve. Rexel provided a positive profit warning. 

The biggest detractors were Ecolab -16.6%, Tinkoff -16.6% and Wickes -14.2%. Ecolab had a profit warning based on the increase in raw material costs and provided guidance 11% below consensus estimates. The company has accelerated their price increases; however, we are re-examining the investment case. The great results released by Tinkoff in November have been overshadowed by mounting tensions between Russia and the Ukraine. The uncertainty and ramifications of these tensions bodes ill for the Russian economy as does the threat of sanctions. The position was exited. Wickes has continued to trade well, and the company has reaffirmed guidance for 2021. Inflation and concerns on a slowing UK economy appear to have hurt sentiment on Wickes shares, which trade at attractive multiples and should offer modest growth. 

The team is tracking a number of very high growth companies that fulfil our criteria, but that we still consider to be too expensive. It is likely that as the tide of liquidity goes out, assets such as these will become available at attractive prices.