Global Leaders Equity Portfolio: July 2020


Summary

  • June saw the global equity market continue its rebound and the Ashburton Global Leaders portfolio rise by 2.3%
  • Technology stocks performed particularly well with the sector rising 7.4%
  • Global money supply remains very supportive for equity markets.
Market update

Global equities continued to rebound strongly in June increasing 3.2%. Technology and consumer discretionary stocks performed particularly strongly while healthcare and consumer staples lagged. The Global Leaders portfolio rose 2.3%. This brings year-to-date performance of the portfolio to minus 4.7% versus the EAA Fund Global - Large Cap Blend Equity peer group performance of minus 7.1%.

June is typically a quiet month for corporate reporting and there was little to note on a stock specific basis. The portfolio’s technology holdings were the top performers during the month with NXP Semiconductor, Adobe and Microsoft all providing double digit returns. The portfolio’s healthcare holdings and financial stocks performed the worst. The performance of Berkshire Hathaway has been disappointing this year. The company has exited many of their failed airline, oil and bank investments and continues to hoard cash. Their decision to not reinvest while markets were low earlier in the year was somewhat surprising. On a sum of the parts basis however, we believe that their shares remain cheap relative to intrinsic value and ought to prove more defensive should the market rally come to a sudden end.

Trading activity was muted with a small trim made off Microsoft in order to top up NXP Semiconductor. 

Explanations of the continued rally in the equity markets include governments ending lockdowns, hopes of a COVID-19 vaccine being developed in the near future, and the self-perpetuating nature of bull markets with those on the side lines jumping in over “fear of missing out”. The continued rise of coronavirus cases in the United States (US) suggests that ending of their lockdowns might have happened too early, despite testing and tracking tools being available. We remain hopeful of successful pivotal trials of a coronavirus vaccine soon. The United Kingdom (UK) Oxford group trial, being run by AstraZeneca for instance, should see results by the end of August. Governments and charitable bodies have taken the unusual step of mass manufacturing the vaccine, and several other potential vaccines, in advance of definitive clinical evidence. This could result in vaccination programs beginning as early as the end of September.

The biggest driver of markets though, is likely the ongoing easing of money supply from the central banks who continue to pump newly created currency into the world while buying up assets. It appears this “unconventional policy” is fast becoming what appears to be the new normal. While we believe preventing problems of liquidity is justifiable, trying to prevent solvency issues sets up continued dependency of certain industries and economies on financial stimulus. 

One significant consequence of this monetary policy on markets is the substantial reduction in the expected returns available from non-equity asset classes. This forces investors looking for return seeking assets, to invest into equities. In their search for greater returns on investment, a recent change in the US Federal Reserve’s (the FED’s) mandate may allow the Fed to start purchasing equities, this would be in line with policies from other central banks like the Bank of Japan (BoJ) and Swiss Central Bank, who already have a policy to purchase equities. It would be an extraordinary move by the FED, controllers of the world’s reserve currency, and it is hard to think how such a move would assist underlying economies. These are however extraordinary times.

A client recently asked what the best investments would be to own if the current global financial monetary system was to collapse. While we think this is unlikely, we would suggest that owning a collection of stakes in leading companies who are generating profits would be a good idea.

We continue to believe that a focus on quality companies offering growth at a reasonable price will result in long term out performance.

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