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Equities Commentary, December 2019

Please find below a summary of performance, activity and outlook from December 2019 from our fund managers.

Jonathan Pines Portfolio Manager

Market and Performance review

The MSCI All Countries Asia ex-Japan Index returned 6.42% in US Dollar terms in December. The Fund under performed the benchmark on a relative basis over the month. The under performance resulted primarily from our stock selection in China and Korea. Our country allocation, notably our underweight India which under performed, helped partially offset the losses.

ASE Technology, a Taiwanese semiconductor testing and assembly company, contributed the most after reporting solid Q3 results supported by acquisition synergy and 5G smartphone growth. China Oilfield Services, an integrated oilfield services provider, rose on the positive outlook for domestic oil/gas reserve booking and production and higher capex from parent company CNOOC. Samsung Electronics, the Korean consumer and industrial electronic equipment manufacturer, rose on the improving sentiment of the memory cycle and stabilisation of DRAM prices.

Non-exposure to Tencent, China’s leading internet services provider, detracted as shares jumped 27% since an October low due to a better earnings outlook. Bangkok Bank fell given lacklustre loan growth, interest margin slippage and anticipation that the Thai economy will be subdued in 2020 with further rate cuts expected. Cosco Shipping Ports, a Chinese port operator, fell after a recent acquisition announcement amid poor capital allocation decisions by a price-insensitive management team.

Outlook

Asia ex-Japan valuations are attractive. While the economic outlook in several sectors looks uncertain, the low prices for which many securities are available provides a margin of safety and a likely satisfactory medium-to-long term performance outlook.

Gary Greenberg, Portfolio Manager

Market and Performance Review

The benchmark MSCI Emerging Markets Index rose 7.46% in US Dollar terms in December. Emerging Markets rose on US-China trade progress and surprisingly strong Chinese domestic data. US tariffs on Chinese exports were scheduled to increase on 15 December, but a phase one trade deal avoided that outcome and provided a significant relief for equity markets. Perceptions that the Federal Reserve is unlikely to raise interest rates any time soon, and December’s United States–Mexico–Canada Agreement (USMCA) trade pact added to the favourable mood. Argentina was the best performing market, while the United Arab Emirates lagged as company specific news impacted the stock market.

The Fund underperformed the benchmark index in relative terms. Stock selection detracted the most to relative returns, notably in the United Arab Emirates and China, offsetting gains from selected names in Brazil, Taiwan and Korea.

Duratex, a Brazilian manufacturer of construction materials and fittings, rose amid indications of a housing recovery in Brazil and the correlated performance of its construction materials segment which marked stronger than- anticipated sales in September and October. Samsung Electronics, a global leader in semiconductors, telecommunications, and digital technology, moved higher on the improving earnings outlook. Its core memory business is expected to see earnings recover in 2020 driven by rising shipments of 5G smartphones and global data centre demand. Notre Dame Intermedica, a Brazilian Health Care plan provider, continued higher after the completion of a capital raise to finance a major acquisition in the South East of the country, which will give them a base to expand into a large market they were not previously present in.

NMC Health, an integrated private healthcare operator in the Middle East & Europe, fell sharply as short seller Muddy Waters issued a report questioning the group’s asset purchases, capital expenditures to related parties and the manipulation of its balance sheet to understate its outstanding debt. The team spoke with the Management following the short seller attack and obtained a high-level clarification on the issue. Hermes also engaged with the Board demanding an independent enquiry to re-establish trust in the group – NMC’s Board accepted our proposal and committed to hire a credible advisor in January 2020. Nari Technology, a mainland China smart grid equipment supplier, fell as the State Grid announced they will rationalise capex. Shares in Baozun, a leading brand e-commerce solutions provider in China, fell as investors weighed uncertainty in the business outlook due to softer-than expected Q4 2019 revenue guidance, shareholder lawsuits, and news of a warehouse fire.

Outlook

Emerging Market economies are benefiting from benign monetary/liquidity conditions and experiencing a cyclical recovery after a period of sluggish growth. The Emerging Markets (EM)/Developed Markets growth differential is likely to expand in 2020/21 as economic growth in the US moderates creating favourable conditions for investments in EM. Structural reforms are crucial for the growth differential to sustain as monetary easing is likely to be limited going forward and excessive fiscal stimulus is not prudent from a macro stability perspective. Major economies such as China, Brazil, India, and Russia are pursuing reforms that will help improve productivity, sustain growth over the medium term and mitigate any negative implications from volatile geopolitics.

Valuations in EM are fair, a 20% discount on PE and over 30% discount on PB vs DM, at current margins and ROE. With better growth and scope for margin expansion the valuation discount is likely to narrow. Although the economic scenario for EM is improving, China is unlikely to ease or stimulate its economy substantially and the US is likely to cool down. Hence, our preference for growth and quality over value continues. We continue to focus on long term structural trends that are shaping the world and EM with an emphasis on sustainability of business operations. The longer-term case for EM is intact with rising consumption, digitisation and development (including reforms and infrastructure investment) the key drivers of growth.

Gary Greenberg, Portfolio Manager

Market and Performance Review

The benchmark MSCI Emerging Markets SMID Net Total Return Index rose 6.69% in US Dollar terms over the period. Emerging Markets rose on US-China trade progress and surprisingly strong Chinese domestic data. US tariffs on Chinese exports were scheduled to increase on 15 December but a phase one trade deal avoided that outcome and provided a significant relief for equity markets. Perceptions that the Federal Reserve is unlikely to raise interest rates any time soon, and December’s United States–Mexico– Canada Agreement (USMCA) trade pact added to the favourable mood. Brazil was the best performing market and the Philippines was the worst performing market.

The Fund underperformed the benchmark index in relative terms over the month. The underperformance was primarily driven by stock selection in China and the United Arab Emirates. This was partially offset by the positive impact from stock selection in Taiwan, India and Brazil.

Duratex, a Brazilian manufacturer of construction materials and fittings, rose amid indications of a housing recovery in Brazil and correlated performance of its construction materials segment which marked stronger than- anticipated sales in September and October. Notre Dame Intermedica, a Brazilian Health Care plan provider, continued higher after the completion of a capital raise to finance a major acquisition in the South East of the country, which will give them a base to expand into a large market they were not previously present in. Another Brazilian health insurer, Hapvida rose after the company acquired a health plan operator which strengthens their geographic footprint in Sao Paulo’s countryside, a wide addressable market.

NMC Health, an integrated private healthcare operator in the Middle East & Europe, fell sharply as short seller Muddy Waters issued a report questioning the group’s asset purchases, capital expenditures to related parties and the manipulation of its balance sheet to understate its outstanding debt. The team spoke with the Management following the short seller attack and obtained a high-level clarification on the issue. Hermes also engaged with the Board demanding an independent enquiry to re-establish trust in the group – NMC’s Board accepted our proposal and committed to hire a credible advisor in January 2020. Shares in Baozun, a leading brand e-commerce solutions provider in China, fell as investors weighed uncertainty in the business outlook due to softer-than expected Q4 2019 revenue guidance, shareholder lawsuits, and news of a warehouse fire. Nari Technology, a mainland China smart grid equipment supplier, fell as the State Grid announced they will rationalise capex.

Outlook

Emerging Market economies are benefiting from benign monetary/liquidity conditions and experiencing a cyclical recovery after a period of sluggish growth. The Emerging Markets (EM)/Developed Markets growth differential is likely to expand in 2020/21 as economic growth in the US moderates creating favourable conditions for investments in EM. Structural reforms are crucial for the growth differential to sustain as monetary easing is likely to be limited going forward and excessive fiscal stimulus is not prudent from a macro stability perspective. Major economies such as China, Brazil, India, and Russia are pursuing reforms that will help improve productivity, sustain growth over the medium-term and mitigate any negative implications from volatile geopolitics.

Valuations in EM are fair with a 20% discount on PE and over 30% discount on PB vs DM. With better growth and scope for margin expansion the valuation discount is likely to narrow. Although the economic scenario for EM is improving, China is unlikely to ease or stimulate its economy substantially and the US is likely to cool down. Hence, our preference for Growth and Quality over Value continues. We continue to focus on long-term structural trends that are shaping the world and EM with an emphasis on sustainability of business operations. The longer-term case for EM is intact with rising consumption, digitisation and development (including reforms and infrastructure investment) the key drivers of growth.

Geir Lode, Portfolio Manager

Market and Performance Review

Global Equity markets continued to advance in December with the MSCI World returning 3.00%. The catalyst for Global Equity markets was the announcement of Phase 1 of the US-China trade agreement and the halting of tariffs on a raft of Chinese imports in mid-December. Against this backdrop, Europe, which also benefitted from the decisive result in the UK general election that broke the Brexit impasse, was the best performing region. The Alpha Model highlighted a clear preference for Profitability, while Valuation and Capital Structure, reflecting balance sheet strength, were largely avoided.

The Fund outperformed the benchmark index over the period. From a sector viewpoint, stock selection was generally positive with notable contributions from Energy, Industrials and Materials, which outweighed the detraction from Communication Services. From a regional perspective, selection in North America and Europe were the largest contributors and there were no meaningful detractors.

Oasis Petroleum, ASML and Elkem were the largest contributors. Oasis Petroleum increased alongside the oil price, although there was little specific news on the company. 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. Elkem increased alongside Norwegian equities in the month.

The largest individual detractors were SAS, Walt Disney and AMS. 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. Walt Disney gave back some of the strong gains from November as investors took profits. AMS declined due to concerns over its decision to buy Osram, the German lighting specialist.

Outlook

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 modestly 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.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The MSCI World Index returned 3.46% in US Dollar terms in December. The Fund underperformed the benchmark on a relative basis over the period.

Teradyne was the largest contributor to relative returns. It increased amid strong demand for system-on-a-chip testing, which is being driven by the rollout of 5G telecoms infrastructure. Silicon Laboratories also contributed positively on the back of broker upgrades. It is benefiting from a highly diversified customer base with impressive growth potential driven by its exposure to the Internet of Things. Yaoko, the Japanese supermarket operator, increased on little specific news.

The largest detractor was Tullow Oil, which fell after the company cut its production outlook and suspended its dividend, which led to the resignation of its CEO. Brooks Automation fell after delaying its Financial Year 2019 earnings release due to the timing of revenue recognition related to its Semiconductor Solutions division. LivaNova also fell in December, but there was little specific news.

Outlook

Declining economic growth has been a recent concern for the market, exacerbated by the tariff dispute. We remain of the view that we are in a structurally low growth environment (and a flat yield curve one), which may mean occasional “recessions” in key markets, as defined by two quarters of negative GDP. This does not mean, however, that a material recession is imminent despite the longevity of the current economic expansion.

The low growth environment should favour Small Caps as an asset class. The heighted challenge for active managers currently is to divine the best stocks in a scenario of extreme valuations which shows no signs currently of reverting to more normal levels.

James Rutherford, Portfolio Manager

Market and Performance Review

European equity markets posted strong gains at the end of last year, as the FTSE All-World Europe Index returned 2.26% in December and 6.13% over the quarter. Markets were boosted by real progress in the US-China trade dispute, which culminated in the two parties reaching a phase-one agreement in December. The agreement was ratified in January and has already halted further tariffs on Chinese imports which were due to take effect in mid-December. The Fund underperformed the benchmark index in December with the largest contributions to relative returns coming from stock selection in Oil & Gas and our underweight position in Telecommunications. These were offset by detractions from selection in Health Care and Industrials.

The largest individual contributors to relative performance were Inditex, Siemens Gamesa and Barratt Developments. Inditex reported solid results with strong like-for-like sales and better-than-expected earnings and margins. Siemens Gamesa made gains after winning an order for its next generation turbine to supply an onshore wind farm in Sweden. Barratt Developments rose following the Conservative Party’s resounding victory in the UK General Election.

The largest individual detractors to our performance were Qiagen, Wirecard and Valeo. Qiagen fell after it decided to stay independent and rejected approaches from a range of suitors. Wirecard lost value after the Financial Times (FT) reported that it had inflated its cash reserves in 2017 (the company denied any wrongdoing). Valeo declined after it substantially reduced the sales and profitability targets for its joint venture with Siemens and provided underwhelming medium-term guidance.

Outlook

The next few months will probably continue to be dominated by politics and trade. However, with the Brexit impasse broken and progress in the US-China trade dispute, the environment is arguably more stable. Furthermore, the economic backdrop is relatively benign, while negative rates continue to provide valuation support for equities. With market forecasts for low-to-mid single-digit earnings forecasts realistic, we believe that markets will focus more on company fundamentals, which should suit our approach.

Mark Sherlock, Portfolio Manager

Market and Performance Review

The Russell 2500 rose 2.12% in US Dollar terms in December. Global equity markets continued their strong performance in December buoyed by supportive central bank policies, improved economic data and more clarity on US-China trade tensions, the United States–Mexico–Canada Agreement (USMCA) and Brexit. The Federal Reserve continued to expand its balance sheet and appears unlikely to shift from its expansion policies anytime soon. The US economy has continued to show resilience despite weak manufacturing data globally, and China surprised on the upside with strong domestic data. The scheduled US tariffs on Chinese exports were avoided with a phase one trade deal, providing relief to the market, and the USMCA trade agreement added to the positive investor sentiment.

The Fund outperformed the benchmark index over the month. Outperformance was driven by stock selection, notably in the Financial Services and Technology sectors.

Parsley Energy, (oil and gas exploration and production) contributed the most as energy stocks outperformed in December after a rally in oil prices. Ingredion (sweeteners and starches), rose after a reset in earnings expectations; investors began to look through to a more positive set-up for 2020. Cognex (machine vision systems), rose on the potential outlook of a robust iPhone product cycle and a recovery in auto-industry investment activity.

Abiomed (miniature heart pumps), fell the most as near-term sales growth expectations slowed to more realistic levels, however long-term the opportunity remains attractive. LivaNova (medical technology) fell after the company’s Heart Valve business disappointed investors and its higher profile product launches in the innovative Vagus Nerve Stimulation franchise were also pushed out. Brooks Automation (semiconductor capital equipment and biological sample management), fell after it announced in a filing that it would delay its 10-K filing. However, we are of the view that these issues are timing-related rather than structural.

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 in the market during 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 offer an attractive risk/return profile. 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.

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.

Outlook

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.

Tim Crockford, Portfolio Manager

Market and Performance Review

European equity markets posted strong gains at the end of last year, as the FTSE World Europe ex UK index returned 1.68% in December. Markets were boosted by real progress in the US-China trade dispute, which culminated in the two parties reaching a phase-one agreement in December. The agreement was ratified in January and has already halted further tariffs on Chinese imports which were due to take effect in mid-December.

The Fund outperformed the benchmark index in December with the largest contributions to relative returns coming from stock selection in Basic Materials, Oil & Gas and Utilities. There was some detraction from stock selection in Health Care and Consumer Goods.

The largest individual contributors to relative performance were Umicore, Orsted and Lundin Petroleum. Umicore increased after the EU approved €3.2bn of state aid for battery research, which benefits the company, which is a leading premium cathode material producer. Orsted continues to win new orders and signed the largest ever corporate deal to supply offshore wind power to German chemicals company Covestro. There was also news that the Danish government was planning a 10GW offshore wind island. Lundin Petroleum increased alongside the rise in oil prices.

The largest individual detractors to our performance were Qiagen, Valeo and Wirecard. Qiagen fell after it decided to stay independent and rejected approaches from a range of suitors. Valeo declined after it substantially reduced the sales and profitability targets for its joint venture with Siemens and provided underwhelming medium-term guidance. Wirecard lost value after the Financial Times (FT) reported that it had inflated its cash reserves in 2017 (the company has strenuously denied these allegations).

Outlook

The next few months will likely be dominated by politics and trade. However, with the Brexit impasse broken and progress in the US-China trade dispute, there is cause for optimism. Furthermore, the economic backdrop remains relatively benign, negative rates continue to provide valuation support for equities and an easy funding environment for corporates. Despite a 26% rise in the benchmark index in 2019, sentiment towards European equities remains poor and positioning light. Europe is therefore well placed to benefit from asset allocation shifts as we start the new decade.

Tim Crockford, Portfolio Manager

Market and Performance Review

Global Equity markets continued to advance in December with the MSCI All Country World IMI Index returning 3.55% after phase one of the US-China trade deal was reached and a raft of tariffs on Chinese imports was halted in mid-December.

The Fund underperformed the benchmark index in the period. The largest contributions came from stock selection in Real Estate, Materials and Utilities as well as the Fund’s underweight exposure to the US Dollar and overweight position in the Euro. These were outweighed by detractions from stock selection in Health Care and Consumer Discretionary.

On an individual stock basis, Umicore, Orsted and Cogna Educacao were the largest contributors. Umicore increased after the EU approved €3.2bn of state aid for battery research, which benefits the company, which is a leading premium cathode material producer. Orsted continues to win new orders and signed the largest ever corporate deal to supply offshore wind power to German chemicals company Covestro. There was also news that the Danish government was planning a 10GW offshore wind island. Cogna Educacao increased after the Brazilian education ministry extended the use of distance-learning content for higher education courses.

Qiagen, LivaNova and Valeo were the largest detractors. Qiagen fell after it decided to stay independent and rejected approaches from a range of suitors. LivaNova fell in December, but there was little specific news. Valeo declined after it substantially reduced the sales and profitability targets for its joint venture with Siemens and provided underwhelming medium-term guidance.

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 market earnings forecasts realistic, we believe that markets will focus more on company fundamentals.

Regardless, our SDG-focused, theme-driven approach has led to a portfolio of companies that have a range of characteristics, 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 countries’ need to meet the 2030 Sustainable Development Goals. They should ultimately generate shareholder value over the longer-term as positive change has a positive effect on their future through-the-cycle earnings. We believe this will help the Fund achieve positive relative returns over time, regardless of the prevailing style preferences or macroeconomic backdrop.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The MSCI All Country World SMID Cap Index benchmark returned 3.25% in December.

The Fund outperformed the benchmark index return in December. The main reason for the outperformance was stock selection.

Movida Participacoes was the largest contributor. It increased against an improving economic backdrop in Brazil, while management expressed confidence in the growth of its rent-a-car and fleet rental divisions. Landmark Optoelectronics, the Taiwanese supplier of semiconductor components, increased following the US-China trade breakthrough. Yaoko, the Japanese supermarket operator, increased on little specific news.

The largest detractor was Tullow Oil, which fell after the company cut its production outlook and suspended its dividend, which led to the resignation of its CEO. Middleby Corp and Reinsurance Group of America fell on little specific news in December.

Outlook

Declining economic growth has been a recent concern for the market, exacerbated by the tariff dispute. We remain of the view that we are in a structurally low growth environment (and a flat yield curve one) which may mean occasional “recessions” in key markets, as defined by two quarters of negative GDP. This does not mean, however, that a material recession is imminent despite the longevity of the current economic expansion.

The low growth environment should favour Small Caps as an asset class. The heighted challenge for active managers currently is to divine the best stocks in a scenario of extreme valuations which shows no signs currently of reverting to more normal levels.

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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