Against a background of high inflation and continued strength in economic data in the US, central banks have continued to tighten market liquidity. The equity market declined globally with the FTSE All World Index (USD) -3%. Presently good economic news is resulting in negative share price movements. This is because positive economic news means less supportive central banks and the prices of risk assets are highly sensitive to money supply. This can be puzzling for those not involved in financial markets. From a bottom-up perspective, though even for those at the coalface share price moves can still be puzzling. The negative -9.5% market reaction to Alphabet increasing sales 11.9% and earnings 46%, with a 1.6% and 7% increase ahead of consensus estimates respectively, with a benign outlook for instance is difficult to explain while we continue to see fundamental upside to our assessment of intrinsic value.

Disappointingly for the fund managers, both sector allocation and stock selection contributed negatively during the month. The Global Leaders Equity Fund (I class USD) declined -3.9% with consumer staples and communication services the worst sectors.

The best performing stocks during the month were Microsoft (7.1%), Amazon (4.7%) and Visa (2.2%), who provided positive earnings reports. Microsoft and Amazon continue to see positive growth in their cloud businesses. Microsoft is set to rollout AI assistance to Office products which looks set to provide another engine of growth. Amazon retail has enjoyed high margins in the US which they believe will be sustained.

At the negative end NXP Semiconductor declined -13.8%, Kering -11.4% and Paypal -11.4%. NXP’s competitor On Semiconductor provided a disappointing update during the month and TSMC described lower sales from the automotive semiconductor sector. During the shortage of semiconductor trips for the automotive industry following the pandemic, NXP Semi did not indulge in price gouging and we do not expect weakness when the company reports in November. While there is likely to be a reduction in demand of light vehicles, the content per vehicle continues to climb and NXP products are becoming entrenched into larger numbers of models being produced.

Kering reported a 9% contraction in sales which was 2% worse than expected, with the US particularly weak. Margins are likely to contract which has led to a general reduction in earnings expectations for the coming year. It will take some time for the new head of Gucci’s range to contribute positively, but they are seeing early signs of positivity from the Chinese consumer.

Paypal shares declined in the run up to their results against concern around the outlook for spending habits and potential market share loss. Pleasingly, the earnings update provided post the October month end was positive, and the shares experienced a round trip recovery. We are frustrated over some of the commentary relating to the group’s margin decline and investor relations needs to improve to spell out the benefits of their unbranded model which provides incremental earnings growth that the company would not otherwise enjoy.

Trading activity was limited.

Looking forward, there are reasons to think that the performance of equities as an asset class will improve. The Federal Reserve appears to be at the end of their rate hiking cycle. Forward looking economic indicators in Europe look positive and Government policy support for the Chinese economy is being delivered.