Geir Lode, Portfolio Manager
Market and Performance Review
Against a largely negative backdrop, Global Equity markets continued to rally in May as the MSCI World Index returned 4.83%. Cyclicals led the way, although Financials and Energy remained among the laggards, alongside traditional defensive sectors such as Real Estate and Consumer Staples. Echoing the market environment for much of the year so far, the Alpha Model showed a preference for Growth, Sentiment and Profitability, while Valuation continued to be avoided.
Over the month, the Fund underperformed the benchmark index. From a sector viewpoint, the contributions from selection in Consumer Discretionary and Real Estate were more than offset by detractions from selection in Financials, Industrials and Materials. From a regional perspective, selection was successful in Europe, but outweighed by the detraction from selection in North America.
Lululemon, West Pharmaceutical and Lonza Group were the largest individual contributors. Lululemon increased after it started to reopen stores. It has also seen very strong online sales growth as demand for athleisurewear increased as people worked from home. West Pharmaceutical has benefited from the growing trend in the pharmaceutical industry to outsource manufacturing, resulting in strong growth that led to its inclusion in the S&P500 in May. Lonza Group increased after announcing a global collaboration with Moderna to manufacture its proposed coronavirus vaccine.
AIA Group, Barrick Gold and Prudential detracted the most. AIA Group fell alongside the Hong Kong market after protests returned to Hong Kong over China’s plans to implement a national security law. Barrick Gold reported earnings that were in line with expected. However, the share price fell as investors rotated away from traditional safe-haven assets, such as gold. Prudential, which has exposure to Hong Kong, also fell amid the turmoil.
Civil unrest in the US, following the tragic death of George Floyd, has pushed the COVID-19 pandemic off the front pages. Meanwhile, China has paused imports of US agricultural goods after President Trump criticised new legislation that undermines the “one country, two systems” arrangement that has kept Hong Kong autonomous. News such as this would normally cause a sharp “risk-off” swing in sentiment, but Equity markets, seemingly immune from bad news, have continued to rally.
The main reasons for this are the excess liquidity in the market and a lack of attractive alternatives, given the historically low interest rates. Meanwhile, economies are starting to reopen, despite the number of coronavirus cases still growing, and investors are starting to see a path out of this particular crisis. However, markets appear to be priced for perfection, suggesting that many still expect a V-shaped recovery.
The reality is likely to be different, which could lead to more volatility and short-term sentiment swings. Currently, focus has turned towards the more cyclical value areas of the market, following a period of substantial underperformance. However, it is still early days, and whether there will be a sustained value rally remains uncertain. We maintain that the optimal approach in this environment remains diversification. It gives exposure to all corners of the market and helps protect portfolios in times of uncertainty.