Search this website. You can use fund codes to locate specific funds

Equities Commentary, June 2020

Please find below a summary of performance, activity and outlook from our fund managers.

Jonathan Pines Portfolio Manager

Market and Performance review

The benchmark MSCI All Countries Asia ex Japan Index returned 8.39% in June. The Fund underperformed the benchmark over the month. This was primarily due to stock selection in China and Korea which was offset by strong relative returns in Taiwan.

MediaTek, a Taiwanese chip supplier, rose sharply after the US moved to tighten restrictions on Huawei by barring chipmakers using American equipment from supplying Huawei without approval. MediaTek, viewed as an alternative supplier, is seen as a beneficiary of the restrictions. Chow Tai Fook Jewellery, a Hong Kong-based conglomerate, rose on encouraging dividend payout guidance and recovering retail sales momentum. Hon Hai Precision Industry, a Taiwanese electronics manufacturer, rose on positive 2Q revenue guidance amid a renewed focus towards a ramp up in new iPhone production.

Not holding Tencent detracted as the company rose on strong quarterly results, driven by a rebound in advertising revenue from social ads and mobile gaming revenue growth which is benefiting from strong seasonality, more user activity resulting from the coronavirus and a market preference for growing, high quality, dominant companies. Youngone Corporation, a Korean manufacturer of outdoor clothing and products, pulled back after consecutive monthly gains driven by plans to reopen apparel stores. Tingyi, an Asia-based food and beverage maker and market leader in instant noodles, retreated having held up well on food-supply stockpiling as a result of the coronavirus outbreak.

Activity

We have added to some economically sensitive stocks with strong balance sheets that have been hit hard and continue to seek new opportunities where stocks have adjusted inappropriately in response to the changing economic landscape.

We sold Shenergy, an A share listed stock after it had held up well in the initial market sell off. We initiated positions in real estate company, China Overseas Land & Investment and port operator, Adani Ports after the stock price fell and offered an attractive entry point. We also opened a position in Kumho PetroChemical, which stands to benefit from an eventual resumption in economic activity and increased demand for its synthetic rubber component, which are used to manufacture gloves.

Outlook

E-commerce, Mega Cap, Growth and Quality stocks have risen to record valuations as a result of an improved relative industry positioning and even lower interest rates. While the valuations of some of these companies are potentially justified in view of these new dynamics, others have, in our view, risen too much. While we are not yet calling a bubble in the largest benchmark names, there are some slightly smaller companies that are trading at valuations that are hard to justify given even very optimistic assumptions. The market is focusing on opportunities among the fastest-growing companies at present, but ignoring other stocks that have the potential to re-rate from depressed levels despite a less rosy outlook. It is in this second category that we believe there is better potential for outperformance over the medium-to-long term.

James Rutherford, Portfolio Manager

Market and Performance Review

European Equity markets continued to increase in June as the easing of lockdown measures in the region continued and were supported by the abundance of liquidity and lower for longer interest rates that make it difficult to find an attractive investment alternative. The Fund underperformed the MSCI Europe in June. The largest contributions came from our overweight in Information Technology, underweight in Consumer Staples and selection in Health Care. These were outweighed by detractions from selection in information technology, industrials and consumer discretionary and our overweight in health care.

ASML, Deutsche Boerse and Prudential contributed the most to relative returns. ASML displayed continued strong momentum due to positive trends in the semiconductor market. Deutsche Boerse continues to benefit from strong trading volumes. Prudential rebounded after weakness throughout May that was related to the unrest in Hong Kong. In addition, Athene took an 11% stake in Prudential’s US business, Jackson National Life Insurance.

Wirecard, Aena and Inditex were the largest individual detractors. Wirecard fell after Ernst & Young failed to sign off its annual report, citing €1.9bn worth of cash it could not account for. The news was deeply disappointing and called into question the company’s future existence. As a result, we sold out of our position in the firm. Aena retraced after a strong run in the second half of May, although there was little specific news. Inditex reported below-consensus revenues and earnings, although online sales have accelerated strongly. In addition, like-for-like sales in reopening markets like China, Japan and South Korea have recovered very well.

Activity

Aside from the sale of Wirecard, we also closed the position in DS Smith. The company faces headwinds caused by a combination of weaker demand and robust supply, which has put pressure on paper and box pricing and has skewed risk to the downside.

Outlook

Despite the strong market rally since the end of March, there are reasons to believe that markets are well supported. European equities are still substantially lower than at the start of the year, while low interest rates and a lack of attractive alternatives continue to provide a boost. The recovery has, in many ways, followed a normal pattern: growth has retraced the most, while value has lagged – both of which are understandable given the uncertainty.

However, companies whose earnings have been decimated will undoubtedly see a return to growth in the next year or so. This recovery will vary, and we expect cyclical companies that have a structural or thematic exposure to growth to benefit the most.

Meanwhile, it is notable that European equities outperformed their US counterparts in recent weeks – a trend that has the potential to continue. The region has managed the pandemic much better than the US, while there is more constructive talk about the trajectory of the euro. As a rule of thumb, a positive view on the currency tends to boost the region’s assets – something that could stand European equities in good stead in the months ahead.

James Rutherford Martin Todd

James Rutherford and Martin Todd, Co-Portfolio Managers

Market and Performance Review

European equity markets continued to increase in June as the easing of lock down measures in the region continued and supported by the abundance of liquidity and lower for longer interest rates that make it difficult to find an attractive investment alternative.

The Fund outperformed the benchmark in June with ASM International, ASML and Sika contributing the most to relative returns. ASM International and ASML both displayed continued strong momentum due to positive trends in the semiconductor market. Sika should benefit from infrastructure investment, supported by the Green New Deal which highlights the decarbonisation potential in building renovation.

Sartorius, Orsted and Novo Nordisk were the largest individual detractors. Sartorius traded sideways following a period of strong performance, alongside the rotation towards cyclicals. Orsted fell after its CEO resigned in mid-June. Novo Nordisk also suffered, in line with the underperforming health care sector, despite reporting strong test results for its Semaglutide obesity drug.

Activity

The most notable trading activity within the Fund was the switch into Adyen, funded by the sale of Wirecard. Adyen looks set to be one of the long-term winners in the global electronic payments industry. Current market share is set to grow rapidly as their single tech platform gives the company a major competitive advantage, enabling it to win big contracts like eBay and Facebook. While valuation looks full on near-term multiples, on our time horizon and given their returns profile and operating leverage we see significant upside on our discounted cash flow valuation model.

We sold our remaining holding in Wirecard after KPMG said it was unable to obtain the data it needed to complete its audit. We had been reducing the position since January on declining conviction, Wirecard’s un-cooperative stance with KPMG removed the remaining trust we had in the management team, so we closed it out completely.

Outlook

Despite the strong rally since the end of March, there are reasons to believe that markets are well supported. European equities are still substantially lower than at the start of the year, while low interest rates and a lack of attractive alternatives continue to provide a boost. The recovery has, in many ways, followed a normal pattern: growth has retraced the most, while value has lagged – both of which are understandable given the uncertainty.

However, companies whose earnings have been decimated will undoubtedly see a return to growth in the next year or so. This recovery will vary, and we expect cyclical companies that have a structural or thematic exposure to growth to benefit the most.

Meanwhile, it is notable that European equities outperformed their US counterparts in recent weeks – a trend that has the potential to continue. The region has managed the pandemic much better than the US, while there is more constructive talk about the trajectory of the euro. As a rule of thumb, a positive view on the currency tends to boost the region’s assets – something that could stand European equities in good stead in the months ahead.

Gary Greenberg and Kunjal Gala, Co-Portfolio Managers

Market and Performance Review

The benchmark MSCI Emerging Markets Index rose 7.35% in June. Emerging Markets continued their recovery for the third consecutive month. Asia, where the Covid-19 spread seems to be contained (Mainland China, Korea and Taiwan), outperformed CEEMEA and Latin America markets where there are increasing concerns around rising cases. China and Taiwan contributed a significant portion of the outperformance in Asia markets, both up more than 9%. Services PMI in mainland China rose to 55.0 in May, far exceeding expectations (47.3) and marked the first expansion in the index since Covid-19 hit. Taiwan’s performance was led by industrials and technology. India underperformed (6.81%) as manufacturing PMI and industrial production continued to contract. South Africa outperformed despite a collapse in exports as inflation touched the bottom of the central bank target range. A surge in Covid-19 cases in Latin America led Brazil’s central bank to cut rates by 75 bps to 2.25% and Mexico’s central bank cut the policy rate by 50bps to 5.0%.

The fund outperformed the benchmark index. Stock selection contributed to the most relative returns, notably stocks in China, Russia and Taiwan. Our overweight China also benefited as the country outperformed and the currency appreciated (reduced to a modest underweight by quarter end).

Baozun, a leading Chinese e-commerce services provider for global brands, rose after reporting strong results benefiting from digitalisation and more international brands allocating marketing resources online to offset the loss of offline sales. Shares in Tencent continued higher as sales for China’s leading internet services provider are expected to be resilient in the face of a potential second lockdown. Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose as earnings are expected to be driven by strong PC/server demand momentum. Delta`s leading position in power should ensure it keeps benefiting from increasing cloud applications and telecom infrastructure upgrades. Its IA business should also benefit from ongoing supply chain relocation and increasing automation.

Shares in Accton Technology, a Taiwanese manufacturer of high-speed 100G and 400G switch solutions, fell given management’s cautious view on H2 2020 operations amid market uncertainties. Credicorp, a well-capitalised Peruvian bank, moved lower given the fragile political and macroeconomic environment. Shenzhen International, a state-owned enterprise that operates a wide range of transportation businesses, including logistics zones, fell as Covid-19 is expected to have a modest impact on its logistics business but a more severe impact on Shenzhen Airlines, in which the company has a 49% equity interest. Its toll road business has largely recovered.

Activity

The team initiated a position in WEG, a Brazilian manufacturer of electric motors, energy generation, storage and transmission equipment, benefiting from industrial net zero carbon emissions targets and ever-increasing efficiency standards. They added Baja Finance, an Indian consumer and SME finance company, which has a solid deposit base (no reliance on wholesale funding), a strong distribution network and a market leading technology platform, bought at an attractive valuation, down 50% from peak in February. They trimmed several names following strong performance including Tencent, Accton, NC Soft, AIA and Techtronic Industries.

Outlook

Emerging markets have rallied strongly from the March bottom, initially driven by unprecedented central bank and government monetary and fiscal stimulus, subsequently from a gradual relaxation of lockdowns as markets anticipate an economic recovery in the second half of 2020. The broadening out of the recovery has extended investor interest to more value sectors, sensitive to the economic recovery and trading at low valuations (at one-point trading close to GFC levels). Market sentiment has improved, and the focus has shifted to a sharp rebound in economic activity.

However, investors must weigh the possibility of further economic damage if there is a second wave and economies move towards lockdown again. Also, the timing and efficacy of vaccines under development is far from clear, the business/consumer sentiment remains low and tensions between the US and China are rising over Huawei and Hong Kong. Crucially, the team believe that the world is likely to remain in a slow growth environment after the initial rebound. Hence, the fund remains focused on quality growth and marginally, adding to cyclicality where they feel that there is enough margin of safety and the company benefits from medium/long-term catalysts.

Geir Lode, Portfolio Manager

Market and Performance Review

The MSCI World Index returned 2.65% in June as global equity markets continued their recovery, completing a clean sweep of positive monthly returns over Q2 2020. Returns have been dramatic; the S&P 500 had its best quarterly return since Q4 1998. Interestingly, we saw a divergence between the drivers of regional markets in June. In North America, the alpha model was ineffective across most factors; In Europe and Asia Pacific, there was a clear preference for valuation, while quality and growth factors performed well in Japan.

Over the month, the Fund underperformed the benchmark index, although the strong performance of the US market on the final day of the month ensured that the midday pricing of the fund had a significant impact on performance. Using close of business prices, the fund outperformed. From a sector viewpoint, selection in information technology and energy was successful, outweighing the detraction from communication services. All regions added value in June, with the most notable contribution coming from selection in Japan.

ASML, AIA Group and Prudential were the largest individual contributors. ASML continued its strong momentum, outperforming the market alongside the semiconductor sector. AIA Group increased alongside the Hong Kong stock market at the start of the month as fears that there would be reprisals from the US, following China’s imposition of the National Security Law, receded. This also boosted sentiment towards Prudential which has a significant presence in Hong Kong. In addition, Athene took an 11% stake in Prudential’s US business, Jackson National Life Insurance.

The largest detractors from stocks held were Duke Energy, Lockheed Martin and Walt Disney. Tesla, which is not held in the fund, also detracted significantly. Duke Energy tracked the US utilities sector, which underperformed in the period. Lockheed Martin underperformed alongside more defensive areas of the market. Walt Disney initially increased after its Shanghai resort reopened, but it fell as the number of coronavirus cases in the US increased.

Activity

Among the most notable trades in June were the opening of a new position in Tate & Lyle and the closure of the position in Pfizer. Tate & Lyle is an attractively valued, cash generative business that is well-managed and operationally efficient. Although Pfizer was cheaper than its peers and continued to score well on profitability, it’s Quality and Sentiment metrics had drifted lower. The position was closed as part of a rebalance that increased the beta of the Fund.

Outlook

Although Global Equity markets were particularly strong in Q2 2020, it is worth remembering that markets have still declined so far this year. As such, we would not be surprised if they continued to rally, supported by an abundance of liquidity and signs that the economic recovery could be quicker-than-expected. All eyes remain on the US and the latest data shows consumer sentiment recovering strongly, while retail sales and manufacturing have also rebounded well, adding weight to those that believe in a v-shaped recovery.

We are positively inclined towards equities currently, but recognise that there are several potential risks that could create a huge amount of uncertainty. The accelerating number of coronavirus cases in the US is, save for a couple of exceptions, in direct contrast to most other regions. However, the largest increases seem to be concentrated mainly in States that have less of an impact on the US economy, although there is always a risk that it could spread. Meanwhile, politics continues to be influential and is likely to become more so ahead of the US elections, creating another source of potential volatility.

We remain of the belief that diversification, alongside a preference for companies with durable business models that are attractive from multiple perspectives, will be key in negotiating the market environment in the coming months.

Lewis Grant, Portfolio Manager

Market and Performance Review

The MSCI All Country World Index returned 3.20% in June as global equity markets continued their recovery, completing a clean sweep of positive monthly returns over Q2 2020. Returns have been dramatic; the S&P 500 had its best quarterly return since Q4 1998. Interestingly, we saw a divergence between the drivers of regional markets in June. In North America, the alpha model was ineffective across most factors; In Europe and Asia Pacific, there was a clear preference for valuation, while quality and growth factors performed well in Japan.

Over the month, the fund underperformed the benchmark index, although the strong performance of the US market on the final day of the month ensured that the midday pricing of the fund had a significant impact on performance. Using close of business prices, the fund outperformed. From a sector viewpoint, selection in information technology, energy and consumer discretionary was successful, outweighing the detraction from communication services. From a regional perspective, contributions from selection in North America and Japan outweighed the detraction from emerging Asia.

ASML, Lam Research and AIA Group were the largest individual contributors. ASML and Lam Research continued their strong momentum, outperforming the market alongside the semiconductor sector. AIA Group increased alongside the Hong Kong stock market at the start of the month as fears that there would be reprisals from the US, following China’s imposition of the National Security Law, receded.

The largest detractors from stocks held were Abbott Laboratories, Walt Disney and TJX Companies. Tencent, which is not held in the fund, also detracted significantly. Abbott Laboratories fell alongside the health care sector on little specific news. Walt Disney initially increased after its Shanghai resort reopened, but it fell as the number of Covid-19 cases in the US increased. TJX fell alongside bricks and mortar department stores with sentiment likely affected by rising Covid-19 cases.

Activity

Among the most notable trades in June were the opening of a new position in PayPal and the closure of the position in Ford Motor Company. PayPal is well-liked and has strong growth and profitability scores, which justify its premium valuation. Meanwhile, concerns over Ford’s ability to pay its dividend from existing cash led to a deterioration in the company’s capital structure and our overall assessment of the company.

Outlook

Although global equity markets were particularly strong in Q2 2020, it is worth remembering that markets have still declined so far this year. As such, we would not be surprised if they continued to rally, supported by an abundance of liquidity and signs that the economic recovery could be quicker-than-expected. All eyes remain on the US and the latest data shows consumer sentiment recovering strongly, while retail sales and manufacturing have also rebounded well, adding weight to those that believe in a v-shaped recovery.

We are positively inclined towards equities currently, but recognise that there are several potential risks that could create a huge amount of uncertainty. The accelerating number of Covid-19 cases in the US is, save for a couple of exceptions, in direct contrast to most other regions. However, the largest increases seem to be concentrated mainly in States that have less of an impact on the US economy, although there is always a risk that it could spread.

Meanwhile, politics continues to be influential and is likely to become more so ahead of the US elections, creating another source of potential volatility. We remain of the belief that diversification, alongside a preference for companies with durable business models that are attractive from multiple perspectives, will be key in negotiating the market environment in the coming months.

Hamish Galpin, Portfolio Manager

Market and Performance Review

Market and Performance Review

The Fund outperformed the benchmark index return of 2.57%. Stock selection was the main source of positive relative returns, particularly in the industrial sector, with asset allocation also supportive.

Open House’s shares continued to rise in June following the release of strong H1 2020 numbers in May with a statement that business had somewhat returned to normal, with pricing showing little change; nevertheless, prudently they are making some attempt to reduce costs in case of any future weakness. Teradyne's share price staged a strong recovery in the second quarter alongside other semiconductor related stocks. Cargojet shares rose as cargo carriers see increased demand whilst passenger airlines are operating fewer planes.

Relo Group’s shares fell with fears that their outsourced relocation and hospitality services were vulnerable to weakness caused by Covid-19. Information technology company Caci International fell despite a reassuring update to the market and announcing a large contract win. Steris, having performed strongly in May, went ex-dividend in June and gave back some of the prior month gains on limited news.

Activity

The fund made no complete sales or purchases during the month. Towards the beginning of the month we took profit from our holding in West Pharmaceuticals and topped up holdings in Marr Spa, retail opportunities and our newest holding, Central Asia Metals.

Outlook

We will continue to keep close watch on stocks in the Fund that have a higher risk profile in the current economic environment. It is clear, though, that large parts of the market have been sold down heavily on fears of the impact of Covid-19. Even with a recent recovery, this should still generate some attractive buying opportunities into well positioned businesses for investors such as ourselves with long term horizons. Furthermore, a return, finally, to more normal levels of volatility once the current situation has settled down is very favourable to active managers and their prospects for beating their benchmarks. Smaller companies’ indices are largely below their long-term trends, which is not necessarily the case for large caps, and which bodes well for the asset class.

Martin Todd and Mark Sherlock

Martin Todd and Mark Sherlock, Co-Portfolio Managers

Market and Performance Review

Global equities continued to rise in June with optimism that economies were beginning to restart as lockdown restrictions were eased and governments alongside central banks continued to provide support.

The Fund underperformed the benchmark index in the period. Stock selection and asset allocation detracted from relative performance in the month. The underperformance was concentrated in the health care and information technology sectors.

On an individual stock basis Dexcom was the largest contributor; the company benefited from several broker target price upgrades in the month. Cogna Educacao’s share price rose as we saw the market recovery broaden out into more cyclically exposed names. Lonza also outperformed; the company announced the appointment of a new CEO from Roche, which was well received in June.

Having been top contributors in May, Abcam and Sartorius were the largest detractors from relative performance in the month as investors took profit and we saw some market rotation. The resignation of Abcam’s co-founder from the board was announced during the month as he leaves to concentrate on his other early stage businesses. Sartorius released first quarter results that showed continued growth but noted that Covid-19 created some uncertainty. LivaNova completed a private senior note offering during the month.

Outlook

We expect a volatile second quarter earnings season as the effects of Covid-19 come through in results. The outlook remains highly uncertain; therefore management teams are likely to retain cautious guidance. For many companies, visibility on a new normalised level of demand won’t be evident until the fourth quarter at the very earliest, perhaps not until Summer 2021.

Nevertheless, we remain confident of the long-term outlook for our strategy; impactful companies are essential to help service the unmet needs of the environment and society and are therefore exposed to enduring sources of demand. Covid-19 has resulted in a paradigm shift for responsible strategies in general as it has put focus on the critical need to build resilience in healthcare, food and water security, and across supply chains. It has also put climate change and worker rights under the spotlight. As governments worldwide look to fiscal stimulus to support re-opening economies, we believe that companies addressing the SDG’s remain best placed to benefit.

Mark Sherlock, Portfolio Manager

Market and Performance Review

The recent Equity market rally has slowed, as fears of Covid-19 flare-ups intensified, record US unemployment numbers were posted, and businesses continued to report on challenges faced over the period. However, markets remain buoyed by central bank stimulus and hopes of a successful vaccine.

The Fund underperformed the benchmark index over the month. Underperformance was primarily driven by stock selection in the financial services and health care sectors and outweighed positive selection in producer durables and technology. Sector allocation, a fall-out of the bottom up process, marginally detracted from relative returns, primarily driven by our underweight to Consumer Discretionary.

The top single contributor was Teradyne (semiconductor test equipment) which has performed well as sentiment improves in the semiconductor cycle. Cubic Corporation (transport payment systems) recovered as its Transportation Systems (CTS) division was awarded a multimillion-dollar contract to install advanced traffic management technologies for a city in Mexico. Brunswick (recreational marine products) has continued to rise with the reopening of marinas and expectations of rising participation in outdoor activities such as boating.

Reinsurance Group of America (Life reinsurance) was the largest single detractor due to prevailing concerns over mortality exposure and after an equity offering to shore up the balance sheet. ICU Medical (infusion therapy equipment) outperformed during the March sell off and the IV consumables business posted accelerated growth in May. The underperformance in June reflects a sell on the news reaction. Bio-Rad Laboratories (life science research and diagnostics) pulled back after a period of strong performance due to concerns surrounding declining margins.

Activity

Since late March, equity market performance has largely been driven by enhanced risk appetite supported by central bank liquidity and a continuation of behaviour where momentum and growth outperform. As a reminder, the fund has a long-term holding period and turnover is typically low. We look for entry points into high-quality companies bought below our assessment of their intrinsic value.

June was a quieter month for trading. We have been finding the most upside in the value end of the market and added to our holdings in aerospace, homebuilding and financials through April and May. We believe the Fund is attractively positioned and valuation levels should help mitigate downside risk whilst providing attractive upside potential.

Over the previous quarter, we have been using the market volatility to trim positions in fully valued stocks and to reinvest into high-quality stocks that sold off amid the indiscriminate selling.

Outlook

The challenge for the US government remains to balance the risks of a second wave as the lockdown is reversed, with the negative financial impact. The measures taken, most notably the substantial stimulus package which could rise to be in excess of $4tn, are targeting the areas of the economy which are most affected by this sharp downturn; consumers and small businesses. This has also mitigated stress in the credit markets to some extent. We believe the fund is well positioned for both a rotation into cyclicals and continued outperformance of higher-quality growth companies.

Note: the equities commentaries above are as of 30 June 2020. For coronavirus-related updates, please visit our dedicated webpage.

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications, strategies or products.

Past performance is not a reliable indicator of future performance. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. It should be noted that any investments overseas may be affected by currency exchange rates.

On 26 June 2020, all sub-funds of the Federated Hermes Investment Funds Plc umbrella were renamed to incorporate the new Federated Hermes brand

More Insights

SDG Engagement Equity commentary: Brunswick
We demonstrate how we are engaging with Brunswick to create positive impacts on society.
Asia ex-Japan Strategy Update: June 2020
Jonathan Pines, Lead Manager, gives an update on the Hermes Asia ex-Japan Strategy in June 2020.
Tackling the climate crisis
Climate change is the defining challenge of our time and we are at a defining moment.
Fighting the climate crisis: mitigation and adaptation
Can investors adapt to a new climate normal?
Catalysing impact: how investors can fight climate change
In the first of two special climate-focused episodes of Fundamentals, we ask: is climate action taking a back seat to Covid-19? And what role can impact strategies play in tackling the most defining challenge of our time?
Samsung Electronics: driving the sustainability agenda in emerging markets
Our Global Equity team assess Samsung Electronics’ long-term prospects.