The end of year rally of markets came to a halt in December with the final month of the year delivering negative returns. The FTSE All World index declined 3.7%. The Global Leaders Fund (I class USD) declined 3.4% which, although moderately outperforming the index, given the geographic risk exposures of the fund was a little disappointing. On the positive side China continued along a path of reopening and the prices of equities with links to the country generally continued to rise. We have previously explained our thesis of the likely the end to the zero covid policies in the nation, the depressed share prices of Chinese equities, which help support the relatively high exposure to the country taken in the fund. Backwards looking economic data demonstrated the impacts of the historic zero covid policy with several downgrades to economic growth observed at a macro and micro level within China. Looking forwards we now expect this to reverse. Ping An was the best performing stock held during the month returning 8.2%.
Somewhat surprisingly, given the look through nature of equity investors, and the importance of China to the company’s future, shares of Kering were amongst the worst performing held declining 13.2%. We engaged with the company during the month to address concerns over unacceptable advertising by one of their major brands which senior management is addressing. While China is core to the future growth of Kering, their core market remains the USA where other consumer discretionary exposed holdings also performed poorly with Amazon declining 13.0% and Alphabet 12.5%.
The position in Comcast was sold, and those in Eaton and Schlumberger were trimmed.
The drivers for equity returns remain global liquidity, earnings, valuation and sentiment. The outlook for equities in 2023 and beyond still materially depends on what happens to inflation given the influence this has on the policies of central banks and hence global liquidity. If inflation continues to outstrip GDP growth, central banks will have little choice but to further drain liquidity. Earnings revision risk is generally tilted to the downside with consumers retrenching given increasing costs of living. There are however bright spots within certain sectors and geographic exposures. Valuation multiple of high growth companies have fallen dramatically though many remain at somewhat elevated levels compared to history.
While tough covid times ahead may be difficult for a largely unvaccinated nation, Chinese equities remain reasonably priced and continue to look attractive.