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Global Leaders Equity Fund: March 2022


• Russia’s invasion of Ukraine has exacerbated a risk off environment. The FTSE All- World Index declined 2.5% and the Global Leaders Equity Fund fell 2.8% (I class USD).
• Inflation expectations are now expected to decline less fast, due to sanctions that will be imposed on Russia. All else equal, this likely means that central banks continue with their plans to reduce global money supply, by raising interest rates and reversing quantitative easing.
• A new position was added to Apple. The company ought to benefit from a mobile handset refresh cycle as 5G technology is rolled out, as well as better monetising card payments made through their handsets.

Markets reacted negatively to the invasion of Ukraine by Russia. Ukraine, formally part of the Soviet Union, gained independence in 1991. Russia annexed the Crimean Peninsula from the country in 2014. Russia has made clear their displeasure at what they regard as NATO’s creep towards their borders. With troop build ups on the border and western governments pulling citizens out of the country in January and early February, we had envisaged that Russia looked likely to annex some further modestly sized, and ethnically Russian, regions of Ukraine’s Eastern front. Full invasion of Ukraine was unexpected. With Ukraine not being part of NATO, and Russia being a nuclear power, direct escalation seems unlikely. We do not expect the war in Ukraine to extend westwards, nor for the USA or NATO to become directly involved in the conflict.  The world has however reacted to condemn the actions of Russia and is in the process of implementing a swathe of sanctions targeted against the country.

During the month a new position was established in Apple. The company is well placed to benefit from a handset replacement cycle as networks are upgraded to 5G technology. Additionally, we believe that the firm may begin to better monetise their Apple Pay facility.

During the month the fund’s best performing holdings were AstraZeneca (+6.9%) and Reckitt Benckiser (+5.2%). AstraZeneca reported two phase, three clinical trial successes during the month. These ought to significantly raise expected revenues over the next ten years for the company. Reckitt Benckiser reported reassuring results providing positive margin guidance at a time when peers are revising margins downwards due to inflationary headwinds. Alibaba (-16.4%) and Home Depot (-13.9%) were the main disappointments. Alibaba reported customer growth of 13%, ecommerce growth of 6.8% and cloud growth of 20%, which in aggregate meant that revenue growth was 0.5% below market expectations. With a trailing free cash flow yield of 10%, a prospective one of around 6% and over 30% of the market cap in net cash, we continue to believe the company to be materially undervalued. Home Depot reported in line results but lacklustre guidance. Our expectation is that the US housing market, and by extension - home improvement market will remain robust but there is no doubt the company will enjoy more modest growth in the coming year than during the boom period of home improvement during the lockdown year of 2021.

War in Europe has had immediate impacts for markets within those directly impacted sectors. Russia and Ukraine supply a substantial proportion of the world’s hydrocarbons, as well as precious metals and food. Sanctions will result in further increasing inflation expectations. With both inflation and employment levels both high, central banks would seem obliged to follow through on their plans to reduce global liquidity. Reducing money supply by raising interest rates and actively quantitative tightening ought to reduce asset prices. We remain cautious on equities trading on high multiples.

Written as at 4 March 2022. Commentary covering 01 February to 28 February 2022.