Global Thematics strategy - February 2023

Key points: 

• Global equities rose as slowing inflation raises hope of an end to interest rate hikes
• ‘Connected Consumer’ and ‘Automation’ holdings rebounded strongly
• We added to a financial services company and auto electronics supplier

What’s happening?

Global equity markets rose in January in US dollar terms as slowing inflation in the US and Europe strengthened hopes that central banks will finish raising interest rates over the coming months. All regions posted strong returns led by China where the removal of covid restrictions continues to boost sentiment. On a sector basis, information technology and consumer discretionary notably outperformed while more defensive areas such as healthcare and utilities trailed the broader market. Growth meaningfully outperformed value during the month.

In the US, inflation declined for a sixth consecutive month to 6.5% year-on-year in December from 7.1% in November driven in large part by lower petrol prices. Core inflation remains elevated but the market still cheered the decline in headline rate and expectations of a dovish pivot from the Federal Reserve have increased. The US purchasing managers’ index improved during the month but remains in contractionary territory while the labour market continues to be robust with unemployment at the pre-pandemic low of 3.5% helped by another surge in household employment.

Energy prices in Europe have notably eased as aggressive liquified natural gas buying and lower demand, helped by a mild winter, has led to higher gas inventories. Inflation in the eurozone has subsequently continued to fall to 9.2% year-in-year in December from 10.1% in the previous month. There was no interest rate decision in January but European Central Bank policymakers have indicated further hikes are needed and stronger than expected economic activity in the final quarter of 2022 supports this view. In the UK, inflation ticked down but remains stubbornly high at 10.5% and the International Monetary Fund noted they expect the UK to be the only major economy to shrink in 2023.

Chinese markets started the year strongly as the lifting of covid restrictions provided a tailwind for economic activity in the country. Technology stocks notably outperformed during the month after the Chinese government passed major data protection law which provides more clarity on the regulatory outlook.

Portfolio positioning and performance

The strategy performed in line with the broader equity index (MSCI All Country World) in January as strong performance from ‘Connected Consumer’ and ‘Automation’ was largely offset by weaker returns in ‘Transitioning Societies’ and ‘Ageing & Lifestyle’, which is a reversal of what we saw in December as names that had underperformed came back into favour.

In ‘Connected Consumer’, our position in global ecommerce and cloud services company Amazon rebounded strongly in January. The stock has been under pressure over recent months due to concerns over a possible slowdown in retail spending and demand for cloud services in 2023. However, both businesses continue to hold up well while cost cutting and lower capital expenditure is supportive for earnings and cashflows going forward.

‘Automation’ returns were boosted by our position in Aptiv, which is a leading supplier of electrical architecture and safety products for light vehicles. The company continues to execute well despite ongoing supply chain issues and cost inflation but signs that both are easing is a positive development. Over the longer term, we expect revenue growth to accelerate given attractive exposure to the themes of electrification of vehicles, active safety and autonomous driving.

In ‘Transitioning Societies’, our position in HDFC Bank, which is India’s largest private sector lender by assets, trailed the broader market. The stock outperformed in 2022 so was largely overlooked by investors during the rebound in January. The bank reported strong results during the month with net interest income and loan growth increasing 25% and 20% year-on-year respectively. The merger of HDFC with its mortgage lender parent Housing Development Finance Corp is expected to complete later in the year to create a financial services giant in India.

Returns in ‘Ageing & Lifestyle’ were impacted by our position in leading US health insurer UnitedHealth Group. UnitedHealth is another name that notably outperformed in 2022 so suffered from the rotation during the month despite no change in fundamentals. The company’s core health insurance business has delivered consistent earnings growth while it’s Optum businesses, which span local care delivery, pharmacy benefits management and healthcare technology, provide synergies with the core business, offer diversification and is also growing strongly.

During the month we increased our positions in financial services company American Express, which we think looks attractively valued, and auto electronics supplier Aptiv, given the improvement in supply chain bottlenecks. We also added to Biogen on increased confidence in the biotech company’s pipeline. Conversely, we reduced our exposure to Alphabet due to concerns over advertising demand trends.

Outlook

The developments in Ukraine have added to already heightened levels of market volatility. Beyond the tragic cost of human lives, Russia’s invasion of Ukraine poses significant economic costs through higher energy prices and further supply chain disruptions. Meanwhile, major central banks have embarked upon an extended period of interest rate rises and quantitative tightening in an attempt to rein in inflation. There are still reasons to be positive, however, as economic activity continues to be resilient. While we expect growth to moderate going forward, the trends underpinning the Evolving Economy remain firmly intact and companies that are able to deliver earnings growth in this environment will likely be rewarded.

Solid industrial activity and strong order books for industrial robotics companies highlight the positive outlook for ‘Automation’ while ongoing supply chain disruptions only strengthen the case for automated solutions. ‘Connected Consumer’ companies have benefitted from an acceleration in the adoption of digital technologies since the pandemic and we expect this to continue as the economy forges ahead with its digital transformation. Further commitments from nations globally to dramatically lower emissions, combined with the recent volatility in energy prices, underlines the need for clean energy, storage and energy efficiency solutions which provides a strong tailwind for ‘Cleantech’ companies.

From a demographic standpoint, the ageing global population continues to create opportunities for ‘Ageing & Lifestyle’ companies which are positioned to benefit from long term changes in consumption patterns. Regulatory pressure and protracted covid lockdowns have weighed on sentiment in China but trends which include increasing wealth and financial inclusion, urbanisation and access to healthcare provide a positive backdrop for ‘Transitioning Societies’ more broadly.

We retain the view that high quality management teams, operating businesses with a sustainable competitive advantage in markets that benefit from secular tailwinds are best placed to navigate the evolving economy. The prospect of higher interest rates puts pressure on long duration assets but our preference for companies with healthy cash generation and strong focus on valuation should be supportive. The strategy is therefore well positioned to benefit from the secular shifts we are witnessing globally.

No assurance can be given that the Global Thematics Strategy will be successful. Investors can lose some or all of their capital invested. The Global Thematics strategy is subject to risks including Equity; Emerging markets; Currency; Global investments; Investments in small and/or micro capitalisation universe; ESG.