Global Leaders Fund
After the positive start to the year, February was more disappointing for global investors. Volatility of equity markets is likely to remain high given uncertainties about central bank responses to elevated inflation. With inflation not declining as fast as many had hoped, expectations for continued interest rate rises saw higher growth equities perform worse than traditional value ones. Volatility remains elevated. In this environment active managers can look heroic and villainous from one month to the next, and the best performing stocks one month can be the worst the next. Taking a long-term view on returns and valuations is always the most sensible approach.
Despite the positive environment in China, and high excess savings, companies exposed to the nation generally performed poorly. Negative sentiment towards Chinese shares was likely triggered by escalation of tensions with the USA with a “spy balloon” being shot down in US airspace earlier in the month, resulting in cancellations of planned diplomatic meetings. The National People’s Congress in early March spelled out China’s plans to return to growth and the country will report above 5% GDP growth in 2023. Despite a dubious vaccination program, the nation will endeavour not to report issues with Covid. Typically reported, if not actual, Chinese data are uncannily like their own forecasts. Elsewhere, European activity data surprised positively which together with lower multiples saw superior performance to US listed equities.
The FTSE All World Index declined 2.8% during February, and the Global Leaders Fund (I class USD) underperformed falling 4.5%. Underperformance was mainly due to the poor returns from the Chinese holdings with Alibaba falling 19.7% and Ping An 12.3%. Alibaba reported high quality earnings growth of 14.2%, well ahead of consensus estimates due in large part to good cost management, with good cash conversion further strengthening their sizeable net cash position. Management appeared confident on the outlook for a continued recovery following the end to the zero Covid tolerance policy. There was little direct news on Ping An, and we continue to expect to see a recovery in new business growth as face-to-face sales agent activity becomes possible once again. Shares of the company continue to trade at a wide discount to embedded value and with the central bank being in the unusual position of increasing liquidity in the local market we continue to see this ought to be a favourable environment for the company.
Having seen strong performance in January after positive earnings Haliburton shares declined 11.7% during the month.
The fund’s two largest holdings Eaton and AstraZeneca both reported positive updates and provided the best returns during the month gaining 7.8% and 2.6%. Eaton’s outlook remains extremely strong given the increasing usage of electricity in the energy mix and the company’s disciplined capital allocation. Similarly, AstraZeneca remains well positioned with several approved products with long patent lives with a long runway of growth.
JP Morgan gained 2.4% as analyst forecasts of net interest margin expansion offset the potential rise in bad debts due to higher central bank rates.
A new position was established in Paypal, funded by trimming Schlumberger and fellow payments company Visa. Though buoyed by a shift in spending patterns through the pandemic, arguably Paypal’s recent underlying growth has been understated given the decline in revenue from former parent company eBay. With the growth rate declining Paypal shares had derated materially. The company has an easy-to-use product, widespread consumer acceptance and future scope to monetise their highly popular peer to peer platform Venmo. Given the longer-term growth prospects we believe that shares are undervalued at a mid-teen price earnings ratio.
Global Leaders Fund -4.5%.
Eaton +7.8%, AstraZeneca +2.6%, JPMorgan +2.4%. Alibaba -19.7%, Ping An -12.3%, Haliburton -11.7%.