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Global Equity Growth Portfolio: June 2022

Having been down close to 6% mid-month the global index (FTSE All-World Index) finished the month flat at 0.2%. Global equities have now declined 12.4% year to date. With both employment and inflation high, central banks are generally continuing to tighten monetary policy. The Global Equity Growth model portfolio returned +0.6%, ahead of both the Global Index and the EAA Fund Global Large Cap Growth Equity peer group return of -2.1%.

Trading activity in the strategy was elevated. Against the celebratory background of Her Majesty the Queen’s Platinum Jubilee, high inflation in the United Kingdom means that we have taken a less favourable view on the outlook for the country’s economy. As a consequence, the position in the FTSE 250 was sold. Also sold was Home Depot, as a more attractive opportunity in the consumer discretionary sector presented itself.

New positions were established in Dufry and Align Technologies. Dufry is the world’s leading duty-free operator and is experiencing a huge rebound in operations as international travel recovers. We believe this to be currently underestimated by the market. Align Technologies is the world’s leading manufacturer of clear liners (Invisalign), an alternative to traditional dental wire and bracket solutions. The technology has been experiencing rapid adoption and penetration is around 15% of available user cases. Shares of the stock have performed poorly year to date given the withdrawal of guidance. Much of this is due to a total stop in sales in China, due to the incredibly stringent lockdown conditions. This presents an opportunity to enter at a more sensible entry multiple and anticipation of a rapid recovery in sales in China, as their lockdowns begin to end. 

Enphase Energy (+15.4%) was the portfolio’s best performing holding, as the global energy sector continued to perform strongly buoyed by the strong oil price.  Pleasingly, the new holding in Dufry shares performed strongly rising 11.2% and NXP Semiconductor also performed well achieving (+11.0%)

On the negative side, Argonaut Gold announced a 15% increase in estimated costs for their tier one asset development Magino. The volatility of shares of smaller companies can be high and this is not the best environment to be known to be seeing potentially dilutive share capital. Given that the company continues to explore strategic options, a trade sale looks probable, if shares remain at these depressed levels given that the current share price factors in the value of existing operations seemingly without ascribing any value to Magino. The Magino project remains on track to deliver first gold in Q1/2 next year. Shares declined 44.5%. Shares of Axon Enterprises -9.7% and Reliance Industries -7.4% also fell.

The outlook for all asset prices in a world experiencing quantitative tightening remains challenging. There are a few selected areas of the market that we remain optimistic about. Smaller oil companies and those businesses involved in alternative energy both benefit from high hydrocarbon prices indirectly, with increased expenditure expected on exploration, production and alternatives. Perhaps uniquely, China is expected to experience monetary expansion, an increase in economic activity as fresh covid-19 lockdowns end as well as companies trading on depressed multiples. Semi-conductors remain in tight supply, we envisage this situation will remain for some time and valuations in the sector are attractive.