July saw many companies report earnings, with aggregate average sales and earnings growth of 4.6% and 11.0%, respectively, for all companies reporting globally. This was broadly in line with sales expectations and 6.2% ahead of third-party analyst forecasts of earnings. The earnings increase and positive surprises were most prevalent in the technology sector, however share prices in the sector generally declined in part due to question marks over future levels of growth and the sustainability of profit margins. Overall, the Bloomberg World Index gained 1.6%, while the Ashburton Global Leaders Equity Fund (I Class USD) was down 0.1%.

PayPal (13.4%), Alibaba (9.5%) and J&J (8.0%) were the best performing stocks held. PayPal results were positive, showing higher take rates, lower transaction expenses and lower credit losses. We anticipate that PayPal’s huge market share will continue to be eroded, however growth is expected to still continue. With a price earnings multiple in the low teens, the company continues to trade below our estimate of intrinsic value.

Alibaba’s plans to introduce a 0.6% service fee on Taobao and Tmall merchants were received positively by investors. Trading at very low multiples while continuing to offer substantial growth, make the shares look attractive to us and set to attract mainland Chinese investors when they potentially become eligible to own them starting in September.

J&J announced earnings slightly ahead of expectation, though they lowered guidance to account for recent one-off costs. Investors welcomed management’s cautious optimism regarding their latest attempt to finally resolve the talc litigation.

Kering was the worst performer held during the month experiencing a 15.1% decline in the share price. The company’s results were in line with their recently lowered guidance, but management indicated that the second half of the year will likely see a further 30% decline in operating profit, which was worse than the 10% decline the market was anticipating. The turn-around in Gucci is taking longer than we had anticipated. If this turnaround materialises, the shares still seem significantly undervalued.

Concerns over the earnings generated from cash deposits were again highlighted at Charles Schwab, whose share price declined 11.5%. We believe that in reporting their second quarter earnings the firm may have slightly confused some investors. Management indicated a need for the business to use third party banks to house customer deposits. This may have been interpreted as the company looking to shrink deposits, whereas we see the use of third parties as a way to better manage capital requirements, while maintaining positive customer economics. We hope that better communication on this issue will be forthcoming.

Microsoft’s results were in line with expectations, however the company announced plans to invest more in capital equipment to support more Cloud and Artificial Intelligence (AI) growth. Their shares declined 6.4%.

At the beginning of the month some of the Nvidia position was reduced, as it had become somewhat large and it looked prudent to take some, but not all, chips off the table. The volatility in the Nvidia share price was high during the month with a large increase on the final day of the month following the increased capital expenditure plans outlined by Microsoft.

Recent weaker-than-expected employment numbers sparked fears of a US recession as the Sahm Recession Indicator was triggered. The indicator signals the start of a recession when the three-month moving average of the US unemployment rate is at least 0.5% higher than the 12-month low. Although this indicator has historically been reliable, we do not believe the US will go into recession, as the rise in unemployment figures was partly due to an increased participation ratio as more people move from ‘not working and not looking’ to ‘actively looking’ and employment growth was also positive. US Policymakers held interest rates at current levels in August; however, Federal Reserve Chair Jerome Powell signalled that September rate cuts were on the table. We, therefore, believe the global outlook for growth is positive and continue to look for opportunities, especially in the broader market where certain sectors have not participated in higher markets year to date.

Disclaimer:

Waystone Management Company (Lux) S.A. is regulated by the Commission de Surveillance du Secteur Financier (CSSF) (ref A00000395 & S00000734), Waystone Management Company (Lux) S.A. is a company located in Luxembourg, L-1273 Luxembourg at 19, Rue de Bitbourg. This document is Issued by Ashburton Fund Managers (Pty) Limited (The Investment Manager) (Reg number 2002/013187/07), which has its registered office at 3 Merchant Place, 1 Fredman Drive, Sandton, 2196, South Africa and is an authorised financial services provider (FSP number 40169), registered with the Financial Sector Conduct Authority (FSCA). In South Africa, the Fund(s) is/are approved for promotion under section 65 of the Collective Investment Schemes Control Act 2002. The Fund Prospectus, and further information including pricing and changes, may be viewed at the Fund’s representative office in South Africa: Ashburton Management Company (RF) Proprietary Limited (“Ashburton CIS”), of the same address.

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