After the positive start to the year, February was more disappointing for global investors. Volatility of equity markets is likely to remain high given uncertainties about central bank responses to elevated inflation. With inflation not declining as fast as many had hoped, expectations for continued interest rate rises saw higher growth equities perform worse than traditional value ones. Volatility remains elevated. In this environment active managers can look heroic and villainous from one month to the next, and the best performing stocks one month can be the worst the next. Taking a long-term view on returns and valuations is always the most sensible approach.
Despite the positive environment in China, and high excess savings, companies exposed to the nation generally performed poorly. Negative sentiment towards Chinese shares was likely triggered by escalation of tensions with the USA with a “spy balloon” being shot down in US airspace early in the month resulting in cancellations of planned diplomatic meetings. The National People’s Congress in early March spelled out China’s plans to return to growth and the country will report above 5% GDP growth in 2023. Despite a dubious vaccination program, the nation will endeavour not to report issues with Covid. Reported, if not actual, Chinese data are uncannily like their own forecasts. Elsewhere European activity data surprised positively which together with lower multiples saw superior performance to US listed equities.
The FTSE All World Index declined by 2.8% while the Global Equity Growth Fund (USD I class) fell 4.8%. The fund’s best performing holding were Nvidia +18.8%, Align +14.7% and Rexel +13.5%. All three companies provided encouraging earnings reports. Increasing awareness of the importance of Artificial Intelligence and its impact on the demand for Nvidia’s chips saw great performance from the stock.
On the negative side, one of last month’s winners, Argonaut Gold declined 35.8%. The company recently reported indicating that operating costs have risen for several Mexican operations. The world class Magino mine remains on track for first gold in May this year which ought to now have minimal execution risk. The company’s new CEO has also spelled out plans to investigate a sizeable deposit beneath their existing mine at Florida Canyon.
Match shares declined 23.5% having provided a disappointing update after close at the end of January. With Japan in the process of re-opening after Covid, formally Match’s second largest market, we continue to be hopeful of a longer-term recovery. Alibaba shares declined 19.7% with sentiment negative forwards China. The company reported high quality earnings growth of 14.2%, well ahead of consensus estimates due in large part to good cost management, with good cash conversion further strengthening their sizeable net cash position. Management appeared confident on the outlook for a continued recovery following the end to the zero Covid tolerance policy.
Shares in Blackrock and Eli Lilly were sold, and a new position was established in Paypal. Blackrock tends to act as a leveraged market proxy and the team has for some time had concerns around the potential requirement to gate certain funds should there be a continued decline in market liquidity. Eli Lilly shares have performed well, as the original investment case of increasing diabetic treatment demand played out, as well as a number of promising innovative medicines. The company is due to report a major pivotal trail mid-year but with the share price already seemingly reflecting success of this, the available risk return provided by the stock has turned unattractive, in our view.
Though buoyed by a shift in spending patterns through the pandemic, arguably Paypal’s recent underlying growth has been understated given the decline in revenue from former parent company eBay. With the growth rate declining Paypal shares had derated materially. The company has an easy to use product, widespread consumer acceptance and future scope to monetise their highly popular peer to peer platform Venmo. Given the longer-term growth prospects we believe that shares are undervalued at a mid-teen price earnings ratio.
Global Equity Growth Fund -4.8%. Nvidia+18.8%, Align +14.7%, Rexel +13/5%. Argonaut Gold -35.8%, Match -23.5%, Alibaba -19.7%
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