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Global Leaders Equity Fund: September 2022

Global equity markets continued to decline in September with the FTSE All World index falling 9.5%, the Global Leaders Fund (I class USD) fell the same amount. The rapid tightening of monetary conditions combined with high inflation and reducing consumer financial health, poses substantial headwinds for the equity market. Inflation data remained elevated in the USA with core CPI (excluding food and energy) 6.3% ahead of the survey figure of 6.1%. As outlined at the previous month’s Jackson Hole symposium, containing inflation and the public’s expectations thereof, remains the priority of Central Banks. On the 21st of September the new Dot Plot of each official’s projections for short term interest rates was published. This showed noticeably higher projections for the next few years. In other words, the world’s most important central bank plans to continue to tighten monetary policy.

After Her Majesty the Queen’s funeral the mood in the United Kingdom remains sombre. Kwasi Kwarteng, the new British Chancellor, unexpectedly announced £45bn of unfunded tax cuts including a reduction of income tax for high income earners. This resulted in widespread criticism from the International Monetary Fund, depreciation of sterling and a decline in UK treasury prices. The Bank of England stepped in to reduce yields of long dated gilts.

There remains no end in sight for the war in Europe. Russia’s proposed annexation of four regions of Ukraine does not look set to be agreed peacefully. Gas supplies to Europe have largely been cut off from Russia and oil embargoes look to be agreed for 2023. While stockpiles of gas in the European Union have recovered to target levels, in the absence of Russian gas it remains to be seen if there will be sufficient gas supply for a cold winter ahead. Germany looks particularly exposed with no liquefied natural gas terminals and historically over half of their gas coming directly from Russia.

During the month, the fund purchased more preference shares of Volkswagen Group in advance of their successful initial public offering of shares of Porsche. This should result in a sizeable special dividend in due course.

TSMC -19.6%, Comcast -19.0% and Haliburton -18.0% were the worst performers held during the month, while Hannover Re +2.3% and J&J +1.3% were the only positive absolute contributors.

There was little specific news flow for these companies. They are all however sensitive to the deterioration in the global economic outlook. While we anticipate demand for Halliburton’s services remains robust the share price shows a high correlation to the oil price which fell during the month due to demand concerns. TSMC’s fall with the rest of the semi-conductor sector was amplified by geopolitical tensions between the US, China and Taiwan.

Consensus expected earnings for many companies continue to look overstated for the year ahead, with bottom-up optimism trumping the likely more accurate top-down outlook. Equity multiples meanwhile have compressed meaning that stocks have become a more attractive asset class for long term investors.