Having been down close to 6% mid-month, the global index (FTSE All-World Index) finished the month flat at 0.2%. Global equities have now declined 12.4% year to date. With both employment and inflation high, central banks are generally continuing to tighten monetary policy. The Global Leaders Equity Fund (I class USD) returned 1.5%, ahead of both the index and the -0.5% return of the EAA Fund Global Large Cap Blend Equity peer group.
Against the celebratory background of Her Majesty the Queen’s Platinum Jubilee, the high inflation in the United Kingdom means that we have taken a less favourable view on the outlook for the country’s economy. Inflation was reported at 9% during the month. While rising interest rates ought to benefit net interest margins, Lloyds Bank management have indicated that they envisage their own costs to rise which may off set much of this. While there are at present no signs of stress, we have become concerned that a prolonged high cost of living rise might result in a higher proportion of bad debts in the future than is currently expected. The position in Lloyds Bank was sold.
A new position was established in Volkswagen Preference shares. VW is the world’s largest automaker by revenue and is well positioned to continue to be a leading electric vehicle manufacturer. The company is on track to hold an initial public offering of some of their shares of Porsche and plans to return much of the cash raised in a special dividend.
Schlumberger (+18.3%) was the best performing holding, as the global energy sector continued to perform strongly buoyed by the strong oil price. Pleasingly, the new position in VW gained 12.5% and Comcast shares also performed strongly rising 11.4%. Consumer staples generally performed poorly with inflationary pressures reducing earnings forecasts in the short term. Nestle shares declined 6%. Lloyds Bank shares declined 5.5% and were sold. Apple shares also declined 5.5%.
The outlook for all asset prices in a world experiencing quantitative tightening remains challenging. There are a few selected areas of the market that we remain optimistic about. Energy services and those businesses involved in alternative energy benefit from high hydrocarbon prices indirectly with increased expenditure expected on exploration, production and alternatives. Perhaps uniquely, China is expected to experience monetary expansion and an increase in economic activity, as fresh covid-19 lockdowns end, as well as companies trading on depressed multiples. Semi-conductors remain in tight supply, we envisage this situation will remain for some time and valuations in the sector are attractive.