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Equities Commentary, January 2020

Please find below a summary of performance, activity and outlook for January 2020 from our fund managers.

Jonathan Pines Portfolio Manager

Market and Performance review

The Fund underperformed the benchmark MSCI All Countries Asia ex Japan Index over the month. The underperformance resulted primarily from stock selection in China and our country allocation, notably our underweight to India which outperformed. PowerTech Technology, a Taiwan-based company that packages and tests memory and logic chips, rose as Q4 2019 revenue beat forecasts due to the easing trade war, strong reversal pull-in demand related to data centers and handset brands accelerated the launch of new 5G models. The company also saw gradual earnings improvement as customer inventory was digested.

Simplo Technology, a Taiwan specialist in producing battery packs for notebooks, PCs and electronic vehicle products, rose driven by strong 2019 sales due to market share gains as Japanese competitors back out of notebooks, OLED iPhone order wins, a spike in demand prior to the expected tariff rise in December 2019 and positive progress in its non-IT segment (e-bikes, data center battery back units and home appliances). China South Publishing rose on stable earnings growth from its textbooks and teaching materials for primary and secondary schools. The firm’s healthy cash flow and ample cash on hand supports an attractive dividend yield, estimated at 5.3% in 2019.

ASE Technology, a Taiwanese semiconductor packaging and testing services company, fell as the Coronavirus is expected to have some impact on its EMS business in Q1 2020, while ATM (packaging & testing) demand remains solid. Beijing Capital International Airport moved lower as expectations were for lower passenger throughput traffic in January, mainly dragged lower by the domestic market due to the impact from the Coronavirus and the ongoing transition of flights to Beijing Daxing Airport. MediaTek, a Taiwanese chip supplier, fell as the Coronavirus outbreak is expected to soften Q1 demand for its 5G-enabled chips from smartphone manufacturers who are adopting a cautious approach to near-term production.

Outlook

The outbreak of the Coronavirus has been mostly negative for market sentiment as stock markets have sold-off and the economic ramifications are yet to be realised. Although we are in no hurry to buy, we are seeing opportunities to trade the volatility especially given a likely positive resolution of the virus. Asia ex Japan valuations are attractive. While the economic outlook in several sectors looks uncertain, the low prices for which many securities are available provide a margin of safety and a likely satisfactory medium-to-long-term performance outlook.

Gary Greenberg, Lead Portfolio Manager

Market and Performance Review

The benchmark MSCI Emerging Markets Index fell 4.66% in January which saw the outbreak of the Coronavirus, originating in Wuhan, China. Concerns over the Coronavirus outbreak checked the stock market optimism that followed the signing of a phase one trade deal between the US and China. Markets were less perturbed by the brief flare-up in tensions between the US and Iran, which de-escalated swiftly. Egypt was the best performing market while Hungary lagged as company specific news impacted the stock market.

The Fund outperformed the benchmark index in relative terms over the month. Our country allocation combining currency contributed the most to relative returns, notably our overweight in India which outperformed, and associated exposure to the Rupee which appreciated. Stock selection in Korea and Russia had a positive impact, helping offset weaker stocks in the United Arab Emirates and China.

NC Soft, a Korean online gaming company, contributed the most, given expectations it will report solid Q4 2019 profits thanks to higher-than-expected initial revenue from its newly launched Lineage2M game, as well as a Lineage M revenue rebound leveraging major updates in November, indicating that there has been no user cannibalisation across titles. Bank Rakyat Indonesia moved higher after reporting in line results and with the banks’ strategy to increase profits by growing the more lucrative micro loans to 40% of its loan book, up from 36% currently and lower corporate loans. IRB Brasil, a reinsurer, moved higher as falling retrocession costs, in light of technological improvements, is expected to drive an improved pricing process.

Shares in NMC, which owns and operates hospitals in the Middle East, have fallen more than 60% since short-seller Muddy Waters last year questioned its asset values, cash balance and debt levels. The claims have been rejected by NMC, which has appointed former FBI director Louis Freeh to carry out an investigation into the allegations. Nari Technology, a mainland China smart grid equipment supplier, fell as the State Grid Corporation of China (SGCC) unexpectedly announced a new Chairman, raising concerns about the pace of future grid investment which had been supported by the previous incumbent. Samsonite, the global luggage provider, fell as luggage demand, particularly from the Greater China region, is expected to be negatively impacted by government efforts to contain the spread of the Coronavirus and as its China based supply chain could face some temporary disruptions.

Outlook

Market sentiment following the Coronavirus outbreak is negative, as it impacts the nascent economic recovery in China. However, the situation is likely to be temporary as the Chinese government has stepped up efforts to contain the spread of the virus. The imposition of travel restrictions, extension of the Lunar New Year holiday, and the closure of large tourist attractions illustrate efforts to contain the pandemic.

We have no positions in the most vulnerable country, Thailand, which has a high dependency on tourism, and are underweight but looking to add to our position in China and take it to overweight as the market continues to sell-off. China has already endured a lot of pain, from trade wars to protests in Hong Kong to instances of financial distress at the local level, but it is not “broken.” As of now, the virus is far from being contained but robust measures are being put in place and we anticipate an eventual peak in both the epidemic and the response. If anything, the move to automate production, digitise consumer behaviours and create an AI infrastructure will only accelerate. Timing the peak in the news flow is very difficult so we will be scaling in over a period of time. The Indian market, where we are overweight, is benefitting.

Geir Lode, Portfolio Manager

Market and Performance Review

January was a tale of two halves with markets initially continuing their strong run before declining over the second half of the month after the Coronavirus outbreak in China. Fears that the economic impact of the virus would be worse than SARS - understandable given China’s greater importance to the global economy - fuelled the declines, which were particularly acute in emerging markets. This also led to the outperformance of Growth relative to Value, although falling yields appeared to be the most important factor behind this. The Alpha Model highlighted an avoidance of Valuation and a clear preference for Sentiment, Profitability and Growth. Against this backdrop, the MSCI World Index returned -0.61% in US Dollars.

The Fund underperformed the benchmark index in January and from a sector viewpoint, the largest contribution came from selection in Health Care. This was outweighed by detractions from selection in Consumer Discretionary and Financials. On a regional basis, selection in Europe was successful, but offset by detraction from selection in North America.

American Water Works, Lonza Group and Lockheed Martin contributed the most to relative returns. American Water Works increased as investors turned increasingly defensive over the month, which led to a strong performance in the utilities sector. Lonza reported better-than-expected results, driven by its Pharma Biotech and Nutrition business, which is benefitting from high demand for outsourced drug manufacturing. Lockheed Martin increased alongside the defence sector as tensions between the US and Iran increased. The company also reported earnings ahead of expectations at the end of the month with strong growth across the board.

Oasis Petroleum, Hess and VF Corp were the largest detractors. Oasis Petroleum and Hess declined alongside the oil price, which was impacted by concerns that the Coronavirus outbreak would hit demand. VF Corp reported disappointing earnings and cut its full year guidance following a mixed holiday season in the US, which was primarily due to weakness in Timberland sales.

Outlook

The Coronavirus outbreak in China has caused many businesses to close their doors, while travel has been curtailed as authorities struggle to contain the virus. This has been detrimental to both the Chinese and global economy with supply chains across a range of industries potentially impacted and declining consumption leading the oil price lower. Support, in the guise of a $174bn liquidity injection by the Chinese central bank, has been welcomed, although with rising numbers of people contracting the virus, there is little near-term visibility.

In the US, President Trump is now safe following his expected acquittal from impeachment. In turn, this appears to have strengthened support for him, swinging the odds of a second term more in his favour. Moreover, he is likely to try and bolster his popularity with economically supportive policies in the lead up to the election.

With valuations remaining elevated and the bears ready to pounce, it will be important to be cognisant of potential triggers that could shake market confidence. For the moment though, low yields, progress in US-China trade relations and a US President in election mode should provide support for equities, notwithstanding the uncertainty in China.

Lewis Grant, Portfolio Manager

Market and Performance Review

January was a tale of two halves with markets initially continuing their strong run before declining over the second half of the month after the Coronavirus outbreak in China. Fears that the economic impact of the virus would be worse than SARS - understandable given China’s greater importance to the global economy - fuelled the declines, which were particularly acute in emerging markets. This also led to the outperformance of Growth relative to Value, although falling yields appeared to be the most important factor behind this. The Alpha Model highlighted an avoidance of Valuation and a clear preference for Sentiment, Profitability and Growth in both Developed and Emerging Markets. Against this backdrop, the MSCI ACWI Index returned -1.10% in January.

Over the month, the Fund underperformed the benchmark index. From a sector viewpoint, the largest contributions came from selection in Health Care and our underweight position in Energy, while selection in Financials, Industrials and Information Technology detracted the most. On a regional basis, selection in Europe was successful, while selection in North America and Emerging Asia detracted.

Lonza Group, American Water Works and Visa contributed the most to relative returns. Lonza reported better-than-expected results, driven by its Pharma Biotech and Nutrition business, which is benefitting from high demand for outsourced drug manufacturing. American Water Works increased as investors turned increasingly defensive over the month, which led to the strong performance of the utilities sector. Visa benefited from its attractive Growth and Profitability characteristics but gave back some of the gains after reporting earnings that were slightly below expectations.

The largest detractors were Hess, Giant Manufacturing and Amgen. Hess declined alongside the oil price, which was impacted by concerns that the Coronavirus outbreak would hit demand. Giant Manufacturing, the Taiwanese bicycle-maker, reported decent sales, driven by e-bikes, but ultimately fell on Coronavirus concerns. Amgen reported solid earnings but issued conservative guidance that was below expectations.

Outlook

The Coronavirus outbreak in China has caused many businesses to close their doors, while travel has been curtailed as authorities struggle to contain the virus. This has been detrimental to both the Chinese and global economy with supply chains across a range of industries potentially impacted and declining consumption leading the oil price lower. Support, in the guise of a $174bn liquidity injection by the Chinese central bank, has been welcomed, although with rising numbers of people contracting the virus, there is little near-term visibility.

In the US, President Trump is now safe following his expected acquittal from impeachment. In turn, this appears to have strengthened support for him, swinging the odds of a second term more in his favour. Moreover, he is likely to try and bolster his popularity with economically supportive policies in the lead up to the election.

With valuations remaining elevated and the bears ready to pounce, it will be important to be cognisant of potential triggers that could shake market confidence. For the moment though, low yields, progress in US-China trade relations and a US President in election mode should provide support for equities, notwithstanding the uncertainty in China.

Hamish Galpin, Portfolio Manager

Market and Performance review

The total return of the benchmark index in January was -2.78%. Developed market small cap stocks lagged their large cap peers, which returned -0.7%. In the US, small caps also underperformed large caps with the Russell 2000 (a small cap index) returning -3.3%, underperforming the S&P500, which returned -0.2%. The Russell 2500, a small and mid cap index, returned -2.1%, demonstrating that investors also avoided mid caps.

The Fund outperformed the benchmark index in January. Brown & Brown, CAE Inc and AMN Healthcare contributed the most to relative returns. Brown & Brown, the US insurance broker, reported better-than-expected earnings, driven by upward trends in premium rates. CAE Inc increased after Boeing recommended that all pilots for its 737 Max planes get flight simulator training. San Diego-based AMN Healthcare rose alongside the US Health Care sector in the first half of January. Towards the end of the month the company announced the acquisition of Stratus Video, a leading provider of video language interpretation services for the health care industry, which complements AMN’s existing business and is expected to be immediately accretive to earnings.

The largest detractors were Kirby Corp, Silicon Laboratories and Cineworld Group. Kirby Corp reported better-than-expected top-line growth, but below consensus earnings, which led to several downgrades on concerns over margins. This was compounded by the Coronavirus outbreak, which impacted transportation stocks and the oil & gas companies that are their customers. Silicon Laboratories reported quarterly earnings and guidance below expectations, due to disappointing sales from its ‘Internet of Things’ division. Cineworld declined due to underwhelming box office trends in 2019 which led to concern that this would continue into 2020.

Outlook

Equity market valuation levels are relatively high (and bonds even more so), but this has been the case for some time and in part reflects a low interest rate environment. This in turn reflects excess capital in the financial system as a result of central banks mistakenly thinking that forcing rates lower will stimulate end demand.

Frustrating as this may be for governments and market participants, the low growth environment should favour small caps as an asset class given their generally superior growth prospects. Small cap coverage by the sell side continues to diminish, which favours managers prepared to research stocks themselves and suggests better opportunities to uncover mispriced securities.

James Rutherford, Portfolio Manager

Market and Performance Review

Equity markets started the month on a positive note, but the outlook soon soured after the extent of the Coronavirus epidemic became apparent. Although its effect on the global economy is unknown, it could be significant given that China is a key driver of global industrial growth. This dented sentiment towards cyclical stocks and prompted growth to outperform, boosted by falling yields. Against this backdrop, the Fund outperformed the MSCI Europe Index with stock selection exerting the most influence on relative returns. There was notable success from selection in Health Care, Information Technology, Consumer Discretionary and Financials, alongside contributions from our overweight positions in Health Care and Information Technology. The most significant detractions came from our underweight stance in Utilities and Consumer Staples and our overweight position in Consumer Discretionary.

Wirecard, Lonza Group and Pandora contributed the most to relative returns. Wirecard increased after its Chairman, Wulf Matthias, resigned. The Supervisory Board appointed Thomas Eichelmann, the Chair of its Audit Committee, as his replacement. Lonza reported better-than-expected results, driven by its pharma biotech and nutrition business, which is benefiting from high demand for outsourced drug manufacturing. Pandora pre-released its Financial Year 2019 results, reporting above consensus like-for-like sales in Q4, suggesting the brand relaunch was starting to gain traction.

The largest detractions came from Valeo, Siemens Gamesa and Fresenius. Valeo declined alongside the auto-parts sector, which was compounded by the rotation away from cyclical stocks in the latter half of the month. Siemens Gamesa reported disappointing results, citing costs relating to road conditions, early winter weather and project delays in Northern Europe that reduced margins. Encouragingly, the company has a record order backlog. Fresenius declined on concerns that growth in Kabi, its intravenous medicines division, was yet to recover in the US.

Outlook

The next few months are likely to be dominated by politics and trade. However, with the Brexit impasse broken and progress made in the US-China trade dispute, there is cause for optimism. Furthermore, the economic backdrop remains relatively benign and negative rates continue to provide valuation support for equities and an easy funding environment for corporates. Moreover, sentiment towards European equities remains poor and positioning light. Europe is therefore well-placed to benefit from shifts in asset allocation as we start the new decade.

Mark Sherlock, Portfolio Manager

Market and Performance Review

The Russell 2500 Index fell 2.03% in US Dollar terms in January. Global equity markets began the year on continued optimism from the previous quarter and the signing of the phase one trade deal between the US and China but retreated towards the end of the month as concerns mounted over the outbreak of the Coronavirus and potential economic ramifications. Fears of a slowdown led to a sell-off in global risk-based assets as cyclical equities and commodities fell sharply while safe haven assets, gold and US treasuries, rallied. Developed Market equities outperformed Emerging Market equities over the month, and the US economy remains resilient with signs of a pick-up in services and consumer confidence, despite a continued contraction in manufacturing.

The Fund underperformed the benchmark index over the month. The underperformance was driven by stock selection, notably in the Technology, Financial Services and Producer Durables sectors while selection in Health Care and Materials & Processing contributed.

Brown & Brown (insurance and reinsurance) contributed the most after reporting strong organic revenue growth in Q4 2019. AMN Healthcare Services (healthcare staffing services) rose after announcing an agreement to acquire Stratus Video, which provides video remote language interpretation services. Alliant Energy (utility services) rose as utility stocks benefitted from the market volatility.

Kirby Corp (inland tank barges) fell the most, in line with energy services stocks after a disappointing 2020 outlook. Wintrust Financial (financial services) fell after reporting Q4 2019 EPS results which missed expectations and analysts lowered estimates to reflect lower interest rates. Reinsurance Group of America (reinsurance services) fell as Q4 2019 costs proved a drag on short-term profitability.

Outlook

Heading into this election year, the US economy remains in reasonably good shape with a robust consumer supported by a benign Federal Reserve. Nevertheless, after a strong run for the market in 2019, incremental gains will need to be driven by underlying earnings growth. We see opportunities in areas of the market where macro or geopolitical uncertainty appears to have led to attractive risk/return profiles. Our focus remains on finding high-quality companies that should provide a degree of protection in down markets and may benefit if the market moves higher.

James Rutherford Martin Todd

James Rutherford and Martin Todd, Co-Portfolio Managers

Market and Performance Review

Equity markets started the month on a positive note, but the outlook soon soured after the extent of the Coronavirus epidemic became apparent. Although its effect on the global economy is unknown, it could be significant given that China is a key driver of global industrial growth. This dented sentiment towards cyclical stocks and prompted growth to outperform, boosted by falling yields.

Against this backdrop, the Fund outperformed the MSCI Europe ex UK Index over the month, with stock selection exerting the most influence on relative returns. There was notable success from selection in Health Care, Information Technology and Energy. The most significant detractions came from selection in Industrials and Consumer Discretionary alongside our overweight stance in Energy and underweight in Utilities.

Wirecard, Lonza Group and ASM International contributed the most to relative returns. Wirecard increased after its Chairman, Wulf Matthias, resigned. The Supervisory Board appointed Thomas Eichelmann, the Chair of its Audit Committee, as his replacement. Lonza reported better-than-expected results, driven by its pharma biotech and nutrition business, which is benefiting from high demand for outsourced drug manufacturing. ASM increased after reporting above consensus order intake as the company continues to benefit from positive trends in the logic and foundry markets.

The largest detractions came from Hella, Valeo and Lundin Petroleum. Hella and Valeo declined alongside the auto-parts sector, which was compounded by the rotation away from cyclical stocks in the latter half of the month. Lundin Petroleum reported earnings that were in-line with expectations, but it fell alongside the oil price over fears that the Coronavirus outbreak would reduce demand for oil.

Outlook

The next few months are likely to be dominated by politics and trade. However, with the Brexit impasse broken and progress made in the US-China trade dispute, there is cause for optimism. Furthermore, the economic backdrop remains relatively benign and negative rates continue to provide valuation support for equities and an easy funding environment for corporates. Moreover, sentiment towards European equities remains poor and positioning light. Europe is therefore well-placed to benefit from shifts in asset allocation as we start the new decade.

Martin Todd and Mark Sherlock

Martin Todd and Mark Sherlock, Co-Portfolio Managers

Market and Performance review

Global equity markets started the month on a positive note, but the outlook soon soured after the extent of the Coronavirus epidemic became apparent. Although its effect on the global economy is unknown, it could be significant given that China is a key driver of global industrial growth. This dented sentiment towards cyclical stocks and prompted growth to outperform, boosted by falling yields. The Fund outperformed the benchmark index in the period with stock selection exerting the largest influence on relative returns.

On an individual stock basis, Lonza Group, CSL and Sartorius contributed the most to relative returns. Lonza reported better-than-expected results, driven by its pharma biotech and nutrition business, which is benefiting from high demand for outsourced drug manufacturing. CSL increased ahead of its results after the US Plasma Protein Therapeutics Association (PPTA) reported strong Immunoglobulin trends. Sartorius reported better than consensus sales and earnings for 2019 and the strong underlying growth looks set to continue underpinned by structural growth and sector consolidation.

Hella, Valeo and Illumina were the largest detractors. Hella and Valeo declined alongside the auto-parts sector, fuelled by uncertainty around the impact of the Coronavirus on the supply chain. Illumina fell after issuing disappointing guidance for Q1 2020, although guidance for the full-year is unchanged.

Outlook

We have seen progress in the US-China trade dispute, while negative rates continue to provide valuation support for equities. Moreover, the economic backdrop is relatively benign and with earnings forecasts realistic.

Our Sustainable Development Goals (SDG)-focused, theme-driven approach has led to a portfolio with a blend of growth, value, cyclical and defensive names. These are companies that we believe will benefit from the emerging growth opportunities arising from the desire to meet the 2030 SDGs. They should generate shareholder value over the longer-term as these opportunities boost their through-the-cycle earnings potential. We believe this will help the Fund outperform over time, regardless of the prevailing style preferences or macroeconomic backdrop.

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.


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