A little surprisingly, 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 has 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 Berkshire Hathaway (+9.8%) following a positive update in February. The company increased its stake in Occidental Petroleum by $8 billion and announced the $11.6 billion acquisition of Alleghany.
AstraZeneca (+9.7%) continued to provide good news with their OLYMPIA phase three trial providing a positive outcome. This showed efficacy of their Lynparsa drug in some early-stage breast cancers. Johnson & Johnson shares rose (+7.7%) following a ruling that the controversial move to separate the talc business into a separate entity was approved.
With the exceptions of the hydrocarbon and pharmaceutical sector, European listed equities generally endured a more difficult month and Kering (-10.5%) and Reckitt Benckiser (-9.5%) saw falls in their share prices. We anticipate that much of this market move reflects sentiment change towards Europe given declining economic prospects due to the war in Ukraine and elevated inflation. We believe that both Kering and Reckitt Benckiser are well positioned to raise prices to offset inflation, and further ought to experience continued demand given the continued desirability of luxury goods to the wealthy, and essential consumer staples products to everyone else. On a relative basis, the general fall in prices of European equities generating a large proportion of sales from overseas looks a little overdone. The position in Kering was topped up with proceeds from a small trim of Home Depot.
Ping An shares declined 8.1%. 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 aimed 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. The position in Alibaba was topped up following news from the FSDC meeting and cash position was reduced. We await concrete action from China regulators with interest.
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. The Global Leaders Equity Fund will continue to invest in mega capitalisation companies, generating economic profits that we believe are trading at a discount to their intrinsic values.
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