• Financial markets reacted negatively to the news of Omicron and to the actions by governments globally to re-introduce travel restrictions.
• The FTSE All-World Index declined by 2.5% and the Global Leaders Equity Portfolio by 2.8%.
• During the month, positions in CRH and Unilever were sold and a new holding in Schlumberger was initiated.
One of the core tenants in preventing the spread of any infectious disease are quarantine measures. Governments were arguably too slow to impose travel restrictions early enough for China, following the initial outbreak in Wuhan. The failure of China to alert the international community to COVID-19 led to the unchecked spread of the virus in late 2019 and early 2020. Travel restrictions were also slow to be applied to India following the discovery of the more infectious Delta variant in October 2020. This variant is currently by far the most prominent with cases of the original COVID-19 virus now de minimus. Last month, scientists in South Africa identified an unusual variant of COVID-19 and admirably communicated this rapidly to the rest of the world. This Omicron variant contains over 50 mutations including 30 in the spike protein. Encouragingly early indications are that Omicron may be more readily transmissible however likely to cause less severe disease than previous variants. The international response however was to rapidly close borders while the threat of the new variant can be more thoroughly assessed.
News of the Omicron variant and international travel restrictions resulted in a risk-off environment at month end. The oil price and associated financial instruments fell with expectations of reduced demand and financial stocks were also weak, with some factoring in a slower path to interest rate increases.
The best performing stocks held in the portfolio during the month were NXP Semiconductors (+11.2%), Home Depot (+7.8%) and CRH (+4.5%), all of whom reported strong quarterly results. NXP’s analyst event held mid-month also quantified the sizeable tailwinds the company is benefiting from. Home Depot is continuing to see impressive growth, as the firm benefits from increased home improvement demand. CRH was also buoyed by approval of a fiscal stimulus plan in the USA. The CRH share price exceeded our estimate of fair value and the position was sold.
Another position sold was Unilever. Our original investment case failed to play out and the company has been struggling to pass on input cost inflation. A new position was established in Schlumberger. The company is the largest provider of oilfield services in the world. Increasing regulatory, and indeed investor pressure on oil majors is anticipated to shift hydrocarbon production to National Oil Companies, and smaller players - all of which tend to require increased third-party assistance. The firm is well placed to take advantage of a post-pandemic recovery in capital expenditure while also supporting the shift to sustainable energy through its expertise in low and carbon neutral energy technologies.
The worst performing stocks held during the month were Alibaba (-22.7%), AstraZeneca (-12.1%) and Schlumberger (-10.2%). Alibaba delivered results below expectations and revised down full year sales expectations, from 27% to 20-23%, and margins were more compressed than expected. Investors reacted negatively to the results, though continued growth in the now profitable cloud services business, results provided a silver lining to long term shareholders. Surprisingly AstraZeneca reported weaker than expected quarterly earnings, while retaining full year guidance, and changing policy to earning profits in the future on their COVID-19 vaccines in developed markets. The company remains one of the most attractive growth prospects with derisked and diversified growth ahead. Schlumberger’s share price fell in response to the threat of lockdowns and travel restrictions, in response to the Omicron variant announcement.
Our central case is that the new COVID variant will delay economic recovery only briefly. The focus of investors will return to the messaging from central bankers and the implications of their policies on the pace of money supply growth. Inflation looks to be remaining relatively high and so the team has been examining the ability of companies held in the portfolio to pass on price increases. Investments in companies with strong pricing power should generally see better returns in a higher inflationary environment, than those who struggle to cope with input price pressure.