Global Equity markets continued to decline in September with the FTSE All World index falling 9.5%, the Global Equity Growth Model Portfolio fell 9.2% which was the same as the peer group. 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 Asian Opportunities fund was sold and the position in United Health was trimmed.
Adobe -26.3%, Alibaba -16.2%, Align Technology -15.0% were the worst performers held during the month, while Eli Lilly +7.3% and Smith & Nephew +0.5% were the only positive absolute contributors.
Adobe surprisingly announced an expensive looking acquisition which looks to be somewhat defensive in nature. It is hard to envisage how in the next few years the deal will be accretive to earnings per share. From a longer-term perspective, the firm has a good track record of integration and must have found the target strategically attractive. Shares now trade on around 20 times earnings which we find attractive given mid-teens annual earnings growth.
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