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 Leaders Portfolio gained 5.5% in the month thereby underperforming the benchmark. This was mainly driven by the portfolio’s exposure to China, with Alibaba and Ping An stocks declining 21.4% and 13.1% respectively 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.
On the positive side, Amazon and NXP Semiconductors were up 27.1% and 24.2% respectively. Amazon reported second quarter revenue and profits ahead of expectations with positive guidance for the third quarter. On the expense side, cost headwinds moderated from the first quarter due to easing supply chain and shipping disruptions.
The year-to-date performance of the semiconductor industry has been weak due to the cyclical nature of the sector’s products. However, the sector saw a rally in July 2022 as second quarter earnings were generally not as terrible as feared. This was also due to an announcement that the US Senate had voted to advance a $52 billion bill designed to boost semiconductor competition with China. For NXP Semiconductors, the company reported strength across automotive and industrial despite macro concerns as the supply chain environment remains tight.
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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