- The global equity index (FTSE All-World) declined 4.3% in September with high fears over debt ceiling decisions and potential contagion from the failure of Chinese property developer Evergrande.
- The Global Equity Growth portfolio declined 6.2% with a number of poor stock performances, despite good underlying business growth.
- We anticipate improvement in the near-term outlook for equities, following this set back with swift resolution of the US debt ceiling and Chinese government action to insulate the impact of the Evergrande downfall.
As expected, the Federal Reserve Chair announced that interest rates will remain at zero and the current rate of bond purchases will continue until a reduction is justified by stronger economic data. Meanwhile the dot plot of future interest rate expectations by Federal Reserve Board members indicated a faster rate of interest rate rises than the market had anticipated.
There was however much to fear during the month, with concerns over the US debt ceiling and the terminal decline of Chinese property developer Evergrande. Our expectation is that agreement on the debt ceiling will be reached in short order and before 18 of October when Janet Yellen, secretary of the treasury, predicts the USA would otherwise run out of money. The Chinese government will be keen to prevent any contagion from the failure of Evergrande and there have been considerable monetary injections locally to maintain sufficient liquidity in the insulated Chinese financial system.
The portfolio underperformed the market during the month falling 6.2%. The best contributors were Vermilion Energy +48.3%, Tinkoff +4.0%, Japanese ETF +2.3%, and the worst were Adobe -13.3%, Lancashire -11.8% and Alibaba -11.3%,
Vermilion Energy, the globally diversified oil and gas producer, was a beneficiary of rising hydrocarbon prices. The long-term production profile of operations looks to continue to be underappreciated by the wider market with shares of the firm continuing to trade on a free cash flow yield of over 30%. The firm is deleveraging and, in our view, looks on track to reintroduce dividends sometime next year.
Tinkoff Bank received positive responses from their previously announced expansion into the Philippines and sell side earnings estimates also increased.
Changes in leadership in Japan saw the Japanese stock market perform relatively well, giving hope for an improved corporate operating environment.
Despite reporting results and guidance ahead of consensus, Adobe was the worst performing holding during the month with shares falling 13.3%. Perhaps there was concern in some quarters over the slightly lower than anticipated digital media revenues. The business continues to establish broader footprints within customers and expansion into mobile systems presents further runway for growth. The firm trades on relatively high multiples but we believe that this is justified given a free cash flow yield of just over 2% and growth in excess of 20% per year.
Lancashire Insurance saw their share price fall given speculation of potentially high claims from European floods, South African riots and Hurricane Ida. It remains to be seen how good the company’s underwriting has been in these areas. Underwriting loss events tend to drive catastrophe insurance rates up and we would anticipate premium growth of around 20% for 2022.
The continued weakness from Alibaba shares is, we believe, largely unreflective of business fundamentals. According to the National Bureau of Statistics of China, monthly on-line retail sales in the country continued to climb a further 14% during August. The annual consensus estimate of 18% growth for the calendar year looks to be a little below the year-to-date industry growth seen so far this year of 20%. Our expectation remains that the entrenched market positioning of Alibaba means that, despite a likely increased tax burden, the company is well positioned to navigate additional regulatory measures. This assumes however, that the government is not intent on destroying what is regarded as a global leader in ecommerce and technological advancement.
The team tests the investment cases of stocks that we hold remain valid and this is particularly the case when share price performance of holdings in unsatisfactory. Short term setbacks in the share prices of some wonderful companies that compound intrinsic value such as Adobe are frustrating while our analysts still see upside to valuations, however, are part and parcel of active management. Form is temporary, class is permanent
As outlined last month, the portfolio’s exposure to China has been particularly unhelpful given the shock and awe that has resulted from the introduction of certain government policies. On a fundamental basis, many Chinese stocks look particularly attractive while sentiment is extremely negative. The risk of investing in the nation is clearly elevated given recent government behaviours, and we await further signals from the state to determine when the time may be right to increase exposures to the nation again.