August was generally a disappointing month for risk assets. The FTSE All World Index declined 2.7% (in USD). European and US economic purchasing managers index data was also below market expectation in August. Poor economic news such as this does not necessarily translate to poor equity market performance. Indeed, together with continued reduction in inflation this might provide more scope for less stringent monetary policies going forwards. The Federal Reserve Bank of Kansas City held their Jackson Hole conference at the end of the month. Central bankers seemed keen to remind the world that monetary policy alone is limited on what it can achieve in terms of generating real economic growth rather simply elevating asset prices.
Having surprised very positively until June, economic data in China has since been negative. Concerns over the viability of Chinese property developers remain, along with the knock-on effects that their potential default might have. Despite large firepower and ability for the Chinese authorities to make policy responses, so far these have been muted. Chinese equities generally declined. We note continued strength in the business models of several companies, which combined with low multiples means that we continue to view the market positively.
The Global Equity Growth Fund declined 4.6%. The best performers were Argonaut Gold (+25.1%), L’Occitane International (+15.7%) and Axon (+14.5%). Argonaut Gold reported that they are on track to meet their full year production targets as the new Magino mine comes on-line. L’Occitane International saw shares briefly suspended while the company clarified and published the chairman and majority owner’s intention to take the firm private. Note however that after month-end he decided not to pursue this. Axon released encouraging earnings ahead of market expectation.
The worst performers came from Sea Limited (-43.4%), Tripadvisor (-19.0%) and Paypal (-17.6%). Sea Limited disappointed the market with much lower digital entertainment and lower e-commerce than expected. The company has a better line up of games for the second half of the year and is seeing good growth of financial services. The market reaction to the results was violent and given the growth prospects of the firm we may look to add to the position in due course.
Tripadvisor grew revenues at a slightly higher rate than anticipated, however Viator’s growth reduced overall margins. The Viator business is getting close to profitability which could see the turning point on sentiment for Tripadvisor stock.
Headline reporting of Paypal’s results misleadingly led some investors to believe that lower reported margins was disappointing. Paypal reported top-line growth ahead of expectations, bolstered by a further uptick in transaction volumes. Consumer spending habits within the e-commerce space were resilient throughout both the US and International markets (revenue: +9% and 7%, respectively). Margins were slightly lower due to the continuing change in transaction mix. The company has experienced a shift in mix towards lower margin unbranded processing, this has, however, predominantly been because of rapid growth from the company’s unbranded segment, rather than as a result of a slowdown in branded checkout. The reduction in non-transaction expenses has also helped to support margins in the near term, the company has reiterated 2023 guidance of circa 20% non-GAAP EPS growth.
Exposure to the fast-growing online education sector was added to the Fund in August through two small-mid cap stocks.
The outlook looks similar to that envisaged at the beginning of the year with reduced inflation expectations, liquidity and global growth expectations. In the United States weak economic data suggests elevated recessionary risk, while labour market and consumer confidence remain encouraging.