Global Leaders Equity Strategy - February 2020

Summary

  • The Global Leaders Fund was broadly flat during January which was pleasing given a falling market. Technology holdings performed particularly well, notably Adobe, Alphabet and Microsoft. In contrast to many other sectors, technology has continued to see substantial earnings growth
  • There was considerable trading activity in the month with further reductions in consumer staples holdings and the addition of NXP Semiconductor
  • The Coronavirus has had a real impact on global markets and may present opportunities to enter high quality commodity and Chinese exposed companies at depressed prices. The Global Leaders portfolio is relatively well insulated from the direct effects of the pandemic.

Market update

Equity markets initially began the year strongly with high hopes of further progress on the USA-China trade deal and continued support from central bank policies. Mid-month recognition of the rapid spread of the Coronavirus had a negative impact on share prices. The Global Leaders Fund ended the month falling 0.1% (I Class), against the wider market which declined 1.1%.

During the month, our Global Leaders Fund top performers were all technology stocks. Largely driven by growth in cloud services, Microsoft reported tremendous 2Q 2020 results showing increases of 14% in revenue and 40% in earnings. The firm continues to expect double digit growth for the year ahead. The share price increased 8% during the month. With a high degree of repeat business and barriers to entry we believe that the shares remain an attractive investment. Alphabet and Adobe also performed well returning 7.3% and 6.5% respectively.

At the other end of the spectrum Shell detracted following weakness in end markets which produced results behind consensus estimates. Management reduced their pace of share buybacks. The oil sector is currently out of favour with investors and the company’s transition from an oil to an energy company will take some time. Shares of the whole oil major peer group trade on low multiples and offer attractive dividend yields. Shell is however more defensively positioned than other oil majors given a lower cash cost of production.

The month saw elevated trading activity for the Fund. Exposures to consumer staples were further reduced in line with last month’s commentary. This included the sale of the small remaining position in Anheuser Busch. The CVS Health position was also exited. After three successive sets of expectation beating results the share price had performed well and was close to our target price. Peer Walgreens reported a disappointing update which has negative implications for the firm. The US election is likely to cast a spotlight on drug pricing. CVS Health benefits from the gross to net drug pricing which was of concern.

A new position was established in NXP Semiconductor. NXP provides exposure to a number of exciting themes including the roll out of 5G technology and increasing sensor content in automobiles. The firm is engaged in a variety of projects which we understand have long gestation but promise a substantial increase in future market size. Automotive sales have been relatively depressed of late but nonetheless the shares trade on a relatively low multiple of earnings for the growth on offer.

The speed of the spread so far of the Coronavirus has outstripped that of recent pandemics. This is due to a number of factors including the mass migration within China to celebrate the New Year and the two week period during which infected people show no symptoms but are contagious. Attempts to reduce the spread of the virus will reduce economic activity. This has already had a significant impact to the near term outlook of a number of sectors globally. Earnings estimates have fallen. Commodity prices, notably oil and copper have also fallen, given the reduction in marginal demand. We anticipate that a short term risk off environment may provide entry points to some high quality companies with a high degree of exposure to China. Meanwhile the portfolio is relatively well insulated.
 

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