Longevity Economy strategy - September 2023

We believe that interest rates are peaking and valuation pressures on Longevity stocks should ease

• Growth stock valuations were under pressure due to rising rates and inflation slowdown pace
• Our healthcare names and lack of energy sector exposure weighted performance
• Global populations continue to age likely driving gradual but meaningful changes in consumption patterns

What’s happening?

Global equity markets were mostly weaker in August as they digested strong year to date gains. Rising long bond yields in the United States have created confusion over the outlook for inflation and resulted in some volatile moves within markets. Growth stock valuation levels are once again under pressure due to rising rates and questions are being asked about how fast inflation will come down. This has acted as a headwind to the strategies relative performance.

We continue to believe that inflation will continue to decline. The Core CPI in the US has declined from 6.6% to 4.3%¹ in the last 11 months and further declines are highly likely given trends in the US housing market. This in turn suggests that central banks will soon stop hiking interest rates and that the current rise in yields will not become a new trend. We currently believe that rising long bond yields in the US are driven by technical issues surrounding excess supply, rather than a change in the outlook for inflation and are therefore optimistic that the current valuation contraction is temporary.

A growing conviction that global economies should be able to achieve a soft landing and a renewed commitment amongst OPEC members to restrain production, resulted in the energy sector being the top performer last month.

Portfolio positioning and performance

The Longevity strategy underperformed broader equity markets during the month (as judged by the MSCI AC World Index). There were 2 main drivers behind this. The strategy’s lack of exposure to the energy sector was a hindrance but a larger cause was that due to a number of factors, our healthcare holdings also underperformed.

As previously mentioned, growth stock valuations were under pressure during the month and this trend was exaggerated in the presence of any news that was less than perfect, especially if the stock had performed well year to date. TransMedics fell by more than 30% after reporting a strong quarter, whilst Exact Sciences was down 14% following its positive analyst day. Our diabetes holdings, DexCom and Insulet also suffered sharp declines following the release of some data for Eli Lilly and Novo Nordisk’s GLP-1 drugs which demonstrated efficacy in aiding weight loss. The market concluded that this would slow the growth of diabetes across the world and therefore blood sugar levels would no longer need to be monitored, or insulin delivered for many patients. While this may have a marginal short-term impact, the diabetes market remains large and under penetrated by these technologies and we believe growth should remain strong for both companies.  

We sold our holding in Kao as the company continues to underperform its peers. Amedisys was sold as we believe upside is limited following the announcement it is to be acquired by United Healthcare. Penumbra was purchased as we believe the recent correction the shares have experienced due to multiple compression offers an attractive long term entry point.

Outlook

The market has now embraced the concept that the global economy will achieve a soft landing and that, with inflation peaking, and central bank tightening cycles soon to be in the rear-view mirror, two of the major headwinds to equity market performance are fading. We remain cognisant that interest rate increases impact the real economy with a lag and that there are still growth challenges ahead. Therefore, our belief is that earnings estimate for the more cyclical areas of the global economy are too high and that the current bullish sentiment is likely to be tested over the next 12 months. At the same time, we believe that, despite recent increases, interest rates are peaking, and valuation pressures should ease.

Given that the longevity strategy is tilted towards relatively defensive, growth, companies we expect both of the above trends to be beneficial over time. The healthcare sector, a major area of focus for the strategy, is well positioned for an economic slowdown as its growth profile should be immune to cyclical headwinds, while valuation pressures will also ease.

Despite market volatility, global populations continue to age and this in turn will drive gradual, but meaningful, changes in consumption patterns.