Global equity markets rallied strongly in July with the FTSE All World Index rising 6.9% after declining 8.4% the previous month, a remarkable turnaround. This occurred as global liquidity continues to decline with rising interest rates and quantitative tightening. Second quarter earnings have been mixed, lower-income consumers are feeling the effects of higher inflation, however, high-income consumers are showing more resilience.
The Global Equity Growth Portfolio increased 7.3%, ahead of the FTSE All World Index due to very strong performance from Enphase Energy and Vermillion Energy which were up 45.6% and 36.1% in July respectively. Enphase Energy rallied strongly after better than expected revenue and earnings for the second quarter, along with strong guidance for the third quarter. The company is performing exceptionally well off the back of energy insecurity which is encouraging Europeans to invest in residential solar systems, along with strong performance in the US which is its largest market. Vermillion Energy was stronger as the company announced a buyback programme and due to its exposure to the strong gas pricing environment in Europe where it generates 30% of its revenue.
On the negative side, Alibaba declined 21.4% in the month. The Chinese stock market was weak in general, as the country continues to impose a zero-Covid policy, and the property sector weighs on sentiment. Alibaba, however, declined significantly on the last day of trading in the month as the US regulator added the company to a list of Chinese mainland companies that would be delisted from the New York Stock Exchange. This is due to the Public Company Accounting Oversight Board not being able to sufficiently review the company’s audit papers, a move which we had expected. Alibaba has already been seeking an alternative and is in the process of upgrading its secondary listing in Hong Kong to a primary one. If Alibaba is successful in achieving this, the company will become eligible for trading by mainland China-based investors as early as 2023 via the Stock Connect programme. This would lighten the risk of a liquidity withdrawal in the stock should Alibaba be delisted from the New York stock exchange. We continue to see value in Alibaba in the medium to longer term and believe that China’s policy easing will support performance.
Wickes was also disappointing as the company downgraded earnings guidance for the year due to signs of softening within the DIY markets in the UK.
There was no trading activity during the month. The portfolio remains positioned with a relatively large allocation towards China, both directly and indirectly. This is through companies where the nation accounts for a large proportion of future growth, which we continue to believe is set to experience economic growth and material improvement in money supply. Luxury companies have already begun to report improving conditions in the country which we expect to continue albeit with speed bumps along the way. Elsewhere in the world, however, it’s hard to ignore the deteriorating macroeconomic indicators in developed countries which may be signalling that we are not out of the woods just yet and maintain a cautious stance on risk assets.
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