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A little surprising, March was a positive month for global equities with the global index (FTSE All-World Index) gaining 2.2%. Inflation has continued to remain high, reaching 7.9% in the US, and unemployment levels appear low. These two factors ought to spur on central banks to enact their plans to reduce global money supply by raising interest rates and begin quantitative tightening. The US yield curve is now close to inverting which historically shown an increased probability of a recession. All else equal, we would expect equities to perform poorly in this environment, however, liquidity remains elevated, and many other available assets offer unappealing negative expected returns.
Russia supplies around 20% of global hydrocarbons. Embargoes, and threats of embargoes, are in place which along with a cold European winter and lack of investment in the sector, saw oil and gas prices rise. This had a positive impact upon the Vermilion Energy share price (+12.7%), a direct beneficiary of higher hydrocarbon pricing. Enphase Energy (+21.0%) is also seen as an indirect beneficiary with rising expectations of future growth in solar installations, along with a positive update in February, seeing continued strength in the share price.
Eli Lilly shares also performed well (+14.6%) which was a little ahead of other large capitalisation pharmaceutical companies. With a strong pipeline over the next few years, including promising diabetes treatment Tirzepatide, third party sales estimates have been increasing.
Yum China shares declined 19.9% and Tencent shares declined 11.4%. During the month, Chinese equites incurred a sharp sell-off as the regulatory risk of overseas listings was again highlighted and the nation enacted new lockdowns in attempts to contain outbreaks of Covid-19. The stringent quarantine and containment of the virus with a zero-tolerance approach was admirable in a pre-vaccine world. The new more highly contagious Omicron variant, however, is proving more difficult to contain. Perhaps policy makers share our own doubts over the efficacy of Chinese versus Western developed vaccines. Surely it is only a matter of time before this policy will be changed, perhaps after rolling out Western developed vaccines. A meeting of the FSDC provided considerable hope for investors in Chinese stocks. It reassured investors over support for overseas listings with US and Chinese regulatory bodies working closely together, as well as a number of other issues. Notably, the Committee highlighted the need for more market friendly policies, indicating that there would be an end to the regulatory crack down on the nation’s technology companies, and aim to prevent economic contagion from the property sector. Action on all these fronts would be received positively by markets and towards month end there were rumours that a large aid programme for the property sector was due to be launched. Following month end there was also a softening of stance from the Chinese over allowing overseas auditors access. This has been a sticking point for US regulators. With the Chinese stock market looking relatively cheap in comparison to the rest of the world, and positive noises coming from authorities, we believe the environment for Chinese equities ought to turn positive. An uptick in credit conditions will likely trigger a re-evaluation by global investors of the attractiveness of the market. We await concrete action from China regulators with interest.
Lancashire shares performed poorly with concern over the level of exposure to underwriting losses from aviation business in Russia. Evidently a number of aeroplanes have effectively been expropriated by the country. What is unclear is the legal positions around coverage given the status of war in Ukraine, but not in Russia. Ordinarily policies have war time exclusions for coverage. We anticipate that losses will be contained, and the company ought to benefit from writing business at the higher rates over the next few years.
As we’ve communicated before, global liquidity is at an all-time high. How the central banks reduce this to tame inflation without hurting the real economy is a difficult balancing act. Over the last few years some of the highest growth companies have been trading at ever high market multiples. Many of these companies have seen sharply deteriorating share prices over the last few months. Relative to global equity growth peer funds, the Ashburton Global Equity Growth strategy has been underexposed to this group. Empirically investors tend to be overly optimistic on growth prospects for new businesses, however we continue to track a number of exceptional firms that we would like to have exposure to once we believe that entry multiples are sufficiently compelling.
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