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Global Leaders Equity Fund: October 2022

After the 8.2% year on year inflation figure released in the USA mid-month, the US stock market opened sharply lower before producing one of the largest intraday swings in history ending close to 3% higher. Hope, perhaps, is that with base effects now kicking in inflation may finally be close to peak levels. Both the Federal Reserve and Bank of England raised interest rates by 0.75%. Signalling from the bankers is that future rate hikes may be more muted. Central bankers in Australia, Canada and Norway all tightened policy by less than expected at recent meetings. The FTSE All World Index climbed 6.0% and the Global Leaders Fund (I class USD) +7.0% which was also ahead of the EAA Morningstar Large Cap blend peer group return of 5.5%.

After necessary intervention to support UK based pension funds in the previous month following surprising fiscal policy announcements, the UK Prime Minister Liz Truss resigned, and these policies were scrapped. This improved sentiment towards the country. Intervention continued to take place in markets however most notably in Japan where, with the Yen at its lowest level against the US Dollar in thirty years, foreign policy reserves were used to halt the Yen’s depreciation. The Bank of Japan’s purchase of government bonds continues apace despite now owning over 70% of all long-dated bonds in issue. Confidence in the future of Japan Inc is low despite the increasing market competitiveness given the weaker currency.

Outflows generally continued from emerging markets towards the USA. US Consumers remain relatively well insulated from inflationary pressures given the nature of their long-term mortgages, their distance from European energy supply problems and their appreciating currency. The appreciated currency provided some disappointments to reported earnings of global US companies.

During the month a portion of the protective option was sold.

At a stock level, the most favourable performances came from oil services companies Haliburton (+47.9%) and Schlumberger (+44.9%) both provided encouraging earnings updates and rosy demand outlook for their services. JP Morgan shares also climbed 21.5%.

The Chinese holdings saw share prices decline, following the Communist Party's 20th Congress. President Xi Jinping tightened his grip on power by appointing several loyalists potentially paving the way for greater state control of the economy and markets. Expectations were in place for some announcement of relaxation of the existing zero covid tolerance policy. In the absence of this however investors reacted negatively. Shares of Alibaba (-20.5%) and Ping An (-19.9%) were the worst performing stocks held. Encouragingly, the country has now permitted use of foreign mRNA vaccines for non-local population. There is speculation that this could result in their approval for all citizens. Requirements globally for reopening economies tended to be vaccination administration. Given that recent studies have demonstrated the lack of efficacy of the Sinovac vaccine, public health policies appear in need of a change. Amazon shares also declined 9.4% given earnings disappointments.

Central bank policy will continue to tighten until inflation has been seen to be controlled. A pivot at that point will be more positive for risk assets. With history as a guide, these are likely to recover in prices in advance of underlying economic reacceleration.