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Global Leaders Equity Portfolio: May 2022

Money supply continued to be reduced globally and with a background of continuing high inflation and reasonable employment figures, central banks look to commence quantitative tightening and raise interest rates. This was negative for equity markets. The FTSE All-World Index declined 7.9%.

The Global Leaders Equity Portfolio was slightly more resilient declining 7.2%. Consumer staples and healthcare sectors performed relatively well: Reckitt Benckiser (+3.8%) J&J (+4.8%) and Nestle (+1.6%) were the best performers. These sectors tend to perform better in weak markets.

The worst performing positions were Amazon (-24.0%), Alphabet (-17.7%) and Kering (-15.5%). Amazon reported quarterly revenue growth of 7.3% which was in line with expectations however saw a large increase in freight, shipping and labour costs which resulted in losses from retail operations. Amazon Web Services continues to perform strongly with 37% growth in revenue and 57% growth in operating profit. Given the retail losses overall operating profit declined by 59% and the company also booked a non-cash loss on revaluation of their Rivian Automotive listed investment. This depressed earnings. Amazon has always been a company more focused on long term growth than short term earnings, however these results were clearly more disappointing than had been anticipated.

Alphabet also reported in line sales growth of 23%, which included 44% growth in cloud business. Suspension of the firm’s Russian operations, a low single digit reduction in sales, and a slowdown in revenue growth from YouTube, we believe are to be temporary. With the company’s shares trading on around 20 times earnings we continue to see value in the shares.

Kering reported revenue growth of 21% which was ahead of expectations of 17%, however, sales growth for Gucci (which is the highest margin division) was lower than expected. This is largely due to Chinese lock downs which have meant store closures and the delay of new product activations. Given the superior performance of luxury peers this was disappointing. We envisage that the fresh Chinese lock downs will be temporary in nature and that there will be a demand recovery for the Gucci brand. Elsewhere the brand was strong.

For now at least though, China continues to implement their zero-tolerance approach to COVID-19. This presents something of a challenge given the high rate of transmission of the Omicron variant. Regional lockdowns are hampering Chinese economic activity. These lockdowns also have wider global implications as supply chains will come under further pressure.

Inflation is remaining elevated, monetary supply is reducing, supply chain issues are mounting due to Chinese lockdowns, and both growth and corporate profit expectations are slowing. Overall then the macro-outlook for risk assets, unless central banks change policies, for now remains challenging.