April saw a sustained barrage of Federal Reserve speeches and events. One count was of 45 meetings in just 20 days. With the US banking system continuing to display signs of pressure on the regional banks, central bankers were keen to demonstrate the situation was under control. We continue to see deposit flight to larger better capitalised institutions. The message from the central banks is still that they will reduce global liquidity to tame inflation, and that the US economy is set for a mild recession.
The month saw many companies report earnings. As is typical earnings estimates tend to be well managed by corporates in advance of reporting. Given a weakening economy and typical over optimism for many companies third party estimates generally declined in advance of announcements decreasing the importance of results versus consensus estimates, and enhancing the importance of future guidance from companies. We have for some time been focused on trying to position the fund with companies that can deal with elevated levels of inflation. Pleasingly the consumer staples names held have successfully been passing on inflation, and our healthcare, technology companies and the luxury goods names have also been less impacted than the general market.
With so much uncertainty about the future direction of central banks, and economies it was not surprising that markets were volatile. Generally shares of higher quality, less cyclical and lower growth, companies performed better than lower quality and higher growth companies. The best performing shares during the month were those providing positive earnings updates and outlooks, and conversely those that disappointed saw particularly severe share price declines.
The FTSE All World Index gained 1.6% during the month and the Global Equity Growth Fund (I Class USD) declined 1.0%. The best performers held were Smith & Nephew +19.1%, Lancashire +12.7% and Novartis +11.7%. While the worst performers held were Enphase -21.9%, Alibaba -18.3%, and NXP Semiconductors -12.2%.
Smith and Nephew, the medical technology company, provided a sales update suggesting that our investment case of a resurgent number of elective procedures is playing out. The firm remains on a large multiple differential to peers. Despite record results, with sales up 65% year on year, Enphase disappointed investors with lower than anticipated guidance due to an envisaged slow-down in purchasing behaviour by installers and changes in subsidies in California. Over the medium term, these changes ought to be positive for the company as they will encourage customers to install batteries which they also sell.
A new position was added in L’Occitane International, a fast-growing high margin premium beauty products company. The firm looks set to recover from the cessation of the zero covid tolerance policy in China, travel recovery and both margin and sales expectations look too low against our forecasts. The firm has a market capitalisation of around $4bn however the free float is low. We believe that investors are being more than compensated for this based on our valuation and also looking at peer multiples.
Leading indicators suggest that we are past the peak of inflation which should reduce from here. Lower inflation means more scope for central banks to adopt more dovish policies, or at least to stop tightening monetary conditions. Over the next few months however the relentless messaging from the central banks will be on continued tightening. Our stock picking team continues to seek to identify those shares who we believe will do well irrespective of what those at the helms of currency printing presses decide to do next.