Summary
• During the month the EAA Global Large-Cap blended equity fund peer group declined 6.5%, the FTSE All-World Index declined 4.8%. The Global Leaders Portfolio was relatively resilient falling 2.8%.
• The portfolio’s best performing stocks were Schlumberger +30.5%, Ping An +8.5% and Alibaba +5.9%.
• The biggest detractors were Home Depot -11.6%, Amazon -10.3%, and Blackrock -9.8%.
To support economies during the pandemic, central banks have used a combination of ultralow interest rates and record levels of quantitative easing. This has meant that global liquidity has been at an all-time high. The Chair of the Federal Reserve (FED), Jerome Powell, gave a speech towards the month end. This outlined plans to both raise interest rates and to reverse quantitative easing. Chairman Powell highlighted that the bank’s dual mandate is for stable prices and employment. Since the financial crisis, central banks have been widely thought to have factored asset prices into their policy thinking. Indeed, in a speech in 2013 former Chairman Ben Bernanke outlined an aim of the FED to “push” investors to take more risk. This has led many investors to adopt the “buy the dip” strategy feeling safe in the knowledge that a “central bank put” would step in and support financial markets.
Inflation is at elevated levels; employment is recovering, and economies have largely reopened after the coronavirus pandemic. Investors interpreted Chairman Powell’s comments as an indication that the central bank put is being withdrawn. Financial markets do have an impact on the real economy however the primary market for equities is of minimal consequence. Likely some support from central banks might take effect if high yield spreads were to increase.
During the month the FTSE All-World Index declined 4.8%. The Global Leaders Portfolio was relatively resilient falling 2.8%, while the EAA Global Large-Cap blended equity fund peer group declined 6.5%.
The portfolio’s best performing stocks were Schlumberger +30.5%, Ping An +8.5% and Alibaba +5.9%. Schlumberger provided a positive update in year-end results and a favourable outlook. After six consecutive quarters of margin expansion, management indicated an increased confidence in reaching mid cycle margins of 25% by 2023. The outlook for oil services remains positive with favourable industry fundamentals. Ping An remains ahead of peers in adjusting to more stringent distribution regulation in China. Property exposure is limited, and the bank’s non-performing loan ratio is improving. The company next reports late March. There are relatively few countries globally where central banks are loosening rather than tightening policy. China being one of these, and credit conditions in the country have begun to improve. A statement from the Cyberspace Administration of China stated that Internet companies have become the backbone of the nation’s economy. This was received positively by the market who have been looking for signals from Beijing that the clamp down on Alibaba is at an end.
The biggest detractors were Home Depot -11.6%, Amazon -10.3%, and Blackrock -9.8%. During the month the position in Blackrock was exited. The shares were above the target price, and the ratio of share price to assets under management was above historic levels. A new position was initiated in Hannover Reinsurance. The firm has a good track record of underwriting protection even in extreme claims environments. With claims in recent years being high the expectation is for considerably higher insurance rates, coupled with benefits from rising interest rates on the investment side.
We continue to adopt risk averse positioning. It is likely that as the tide of liquidity goes out, assets will become available at attractive prices.