Global equity markets rallied strongly in July however less so for high dividend stocks with the FTSE ALL World High Dividend Index up 2.8%. The positive move occurred as global liquidity continues to decline with rising interest rates and quantitative tightening. Second quarter earnings have been mixed, lower-income consumers are feeling the effects of higher inflation, however, high-income consumers are showing more resilience.
The Global Equity Income Portfolio rose 1.2% underperforming the All World High Dividend Index with Admiral (-14.4%) and AT&T (-9.2%) placing pressure on performance. Admiral’s share price declined significantly after two of Admiral's competitors in the UK issued profit warnings due to supply chain disruptions and increased inflationary pressures. We believe that Admiral is better positioned than competitors as Admiral's business model is built around active pricing for new business and pricing reforms are expected to affect Admiral to a lesser extent than competitors.
AT&T’s shares fell after the company cut its free cash flow forecast for the year. This was due to slower customer payment times and higher than expected cash expenses which included investments in subscriber growth, along with poor initial guidance. This raised concerns over a potential dividend cut and confidence in management. On the positive side, the company was able to grow its wireless customers and saw very little churn. The company expects a more tepid economic environment moving forward, however, it is a more defensive play in this type of environment and continues to pay an attractive dividend yield.
Diageo and Microsoft both performed well in the month returning 10.1% and 9.3% respectively. Diageo reported results at the top-end of expectations with the company’s sale of premium spirits helping to negate inflationary pressures. Microsoft rose strongly after reporting fourth quarter earnings. Although cloud growth was slightly below expectations the company’s guidance for cloud was better than the market expected. In addition, enterprise demand remains resilient. However, the company is seeing weakness in the consumer part of the business. Overall, better than feared.
There was no trading activity during the month. July was a positive month for equities. However, it’s hard to ignore the deteriorating macroeconomic indicators in developed countries which may be signalling that we are not out of the woods just yet and maintain a cautious stance on risk assets.