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 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 Leaders Fund declined 3.4%. The best performers were Eaton (+12.7%), Visa (+3.5%) and Amazon (+3.2). Eaton reported positive third quarter results and raised guidance 5.7%. The firm maintains an impressive backlog and despite margin improvement management indicates there is scope for further expansion going forwards. Visa, along with largest peer Mastercard raised credit card fees. The worst performers held were Paypal (-17.6%), Ping An (-17.0%) and Siemens (-11.8%). 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.
While Ping An reported substantial growth in new business volumes, concern generally about the potential contagion from property company failures resulted in a reduction in share price.
Siemens was weaker due to lowered guidance for its digital industries division where orders were lower than excepted due to accelerated normalisation of automation demand. This is a temporary adjustment and the secular growth trend remain intact.
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.