Lewis Grant, Portfolio Manager
Market and Performance Review
Global Equity markets continued to advance in December with the MSCI ACWI Index returning 3.52%. In the period, the Emerging Markets posted strong returns after President Trump halted tariffs on Chinese imports in mid-December. With their strong links to the US, Latin American markets led the way. In the Developed markets, Europe, which has reasonably close ties to China, was the strongest region and also benefitted from the decisive result in the UK general election. The Alpha Model highlighted a clear preference for Profitability, while Valuation and Capital Structure, reflecting balance sheet strength, were largely avoided.
Over the month, the Fund outperformed the benchmark index. From a sector viewpoint, the largest contributions came from selection in Industrials, Information Technology and Financials, which offset the detraction from Communication Services. From a regional perspective, selection was successful in North America and Europe, outweighing the detraction from Emerging Asia.
Oasis Petroleum, ASML and Zoetis were the largest contributors. Oasis Petroleum increased alongside the Energy sector as the oil price increased. ASML increased after the company said that it expected 2020 to be another growth year, driven by EUV orders, upgrade packages and a recovery in Memory. Zoetis rose after it increased its annual dividend.
The largest detractors were Walt Disney, China Resources Gas and SAS. Walt Disney gave back some of the strong gains from November as investors took profits. China Resources Gas fell on concerns of decelerating natural gas consumption in China. SAS, the Swedish airline, fell after issuing disappointing guidance for 2020, reflecting low capacity growth and high pilot training costs associated with the delivery of 20 Airbus aircraft.
Our risk aversion monitor suggests investors are currently very bullish, reflecting easier monetary policy and recent economic data that, while mixed, suggests that global growth has picked up overall. Global PMIs have highlighted strength in the services sector, which has offset weakness in manufacturing. Curiously, consumer confidence, which often correlates with manufacturing data, has remained strong. Meanwhile, with central banks running out of ammunition to stimulate growth, there are expectations of increased fiscal spending in the US, Europe and China, which should bolster economic growth.
However, with several sources of political and geopolitical instability, it is far from certain that the pick-up in growth will be sustained. For a start, the trade truce between the US and China looks fragile, while the Middle East looks increasingly unstable following the events in Iran in early January. Moreover, there will be Presidential elections in the US and federal elections in Germany towards the end of the year, which are likely to be a source of volatility throughout the year. Against this backdrop, we expect stock volatility to rise, which leads us to the conclusion that we are entering more of a stock-pickers market.