Lewis Grant, Portfolio Manager
Market and Performance Review
Global Equity markets advanced in November with the MSCI ACWI Index returning 2.44%, propelled by the US against a backdrop of positive earnings surprises (albeit against lower expectations) and marginally more positive noises surrounding the US-China trade tensions. The Information Technology and Health Care sectors were notably strong performers, while Utilities and Real Estate were the laggards. The Alpha Model highlighted a clear preference for Growth, perhaps a sign of declining earnings expectations, while Sentiment and Corporate Behaviour were largely avoided.
Over the month, the Fund marginally underperformed the benchmark index. From a sector viewpoint, the largest contributions came from selection in Communication Services and Financials, which were offset by detractions from selection in Health Care and Information Technology.
From a regional viewpoint, selection was successful in Pacific Free ex Japan, while there were detractions in Emerging Asia and North America.
Walt Disney, Caltex Australia and Discovery were the largest contributors to relative returns. Walt Disney increased after reporting that its new streaming service, ‘Disney+’, was met with extraordinary consumer demand. Caltex Australia increased sharply after Alimentation Couche-Tard bid for the company. Discovery reported earnings ahead of consensus expectations with both its US and International operations seeing growth in distribution and advertising revenues.
The largest detractors were China Resources Gas, Lonza and Hess. China Resources Gas fell amid a bout of profit taking following particularly strong share price performance in October. Lonza fell after its CEO, Marc Funk, announced his departure, which took investors by surprise. Hess fell after Tullow Oil said that it was reassessing the commercial viability of its Guyana wells, where Hess also has operations, due to concerns over the quality of the oil.
As equity markets hit new highs in 2019, uncertainty remains high amid global macro headwinds. As such, caution is advised as growth expectations have been dampened, due in large part to trade tariffs. Despite this weakened outlook there is an appetite for recovery, which is reflected in the market reaction to any progress in the US-China trade dispute. Alongside the trade tariffs, some big challenges remain, particularly with regulatory and wage pressures, although these issues can be overcome through innovation, a focus on cost-cutting and productivity gains. Investors will also need to be vigilant heading into the US election. As the two main political parties battle it out over the next 12 months, key issues of healthcare, jobs and climate could create significant noise over the ensuing year in the absence of visibility into the next Presidential term.
In the UK, the Conservative Party won a resounding majority in the UK general election and although this was anticipated by the polls, the margin of victory was surprising. The initial market reaction was positive as the result removed the uncertainty surrounding the UK’s direction of travel. However, business sentiment is likely to be dampened over the next couple of years as the precise trading arrangement between the UK and Europe is negotiated. As such, until there is further clarity and some positive economic signals our focus remains on revenues from outside the UK due to the subdued domestic consumption.