Global Thematics strategy - March 2022

There are still reasons to be positive with the trends underpinning the Global Thematics continuing to strengthen

• Global equity markets rallied into the second half of March
• Economic activity continues to be resilient
• Our ’Cleantech’ and ‘Ageing & Lifestyle’ themes posted positive returns

What’s happening?

After a weak start to the month , global equity markets rallied into the second half to finish in positive territory overall. More constructive news flow around peace talks in Ukraine, further strength in economic activity and renewed optimism that major central banks will be able to rein in inflation led to an improvement in sentiment. At the regional level, US equities led the way, the UK and Europe were roughly flat while China notably underperformed. Growth stocks regained some lost ground against value during the month.

In the US, consumer sentiment continued to soften as inflation reached a 40 year high of 7.9%¹   while the labour market demonstrated further strength with nonfarm payrolls beating expectations, lower unemployment at 3.8%¹ and further acceleration in wage growth. The Federal Open Market Committee raised its benchmark interest rate by 25bps to 0.50%¹ and indicated further increases will be needed while an announcement on plans to reduce its balance sheet is expected shortly.

Economic activity in Europe has continued to hold up well with the Purchasing Managers’ Index remaining comfortably in positive territory although consumer confidence moved sharply lower in response to higher prices. Trends in the UK were similar with inflation reaching 6.2%¹ year-on-year, better than expected economic activity and further tightening of the labour market. The Bank of England raised its interest rate 25bps to 0.75%¹ during the month. Elsewhere, the European Union  outlined plans to reduce Russian gas imports by two-thirds within a year as it seeks to reduce its dependency on the country’s fuel supplies.

In China, a new outbreak of Omicron led authorities to lockdown several major cities; however, the announcement of more economic stimulus measures and confirmation of a 5.5%¹ growth target for 2022 saw the market rebound at the end of the month.

Portfolio positioning and performance

The strategy underperformed the broader equity index (MSCI All Country World) in March driven by weaker performance from holdings in ‘Transitioning Societies’ and ‘Automation’. On the positive side, ‘Cleantech’ and ‘Ageing & Lifestyle’ notably outperformed.

Our position in Chinese ecommerce company Alibaba weighed most on ‘Transitioning Societies’ performance. The shares have been under pressure since Chinese authorities stepped up their scrutiny of the technology sector following an initial clampdown on private education companies in 2021. Over recent months, concerns about Beijing’s close relationship with Russia, the growing risk of US delistings and renewed covid outbreaks have added further downward pressure on the stock.

In ‘Automation’, wireless technology company Qualcomm detracted most as expectations of a slowdown in consumer demand has weighed on sentiment. We acknowledge the possibility of a slowdown in mobile handset demand but are encouraged by its success in new premium handset launches and think the company is well positioned given its competitive connectivity solutions and significant opportunity in various Internet of Things applications.

‘Cleantech’ returns were supported by our position in Waste Connections, an integrated wate services company that provides waste collection, transfer, disposal and recycling services in the US and Canada. The company continues to post solid growth, both organically and through M&A² , and management remains confident in their ability to price ahead of cost inflation which is an attractive characteristic in the current environment. Low leverage provides scope for additional M&A² while further investment in landfill to gas projects and recycling facilities is expected over the coming years.

In ‘Ageing & Lifestyle’, shares in Dexcom, which offers continuous glucose monitoring systems for people with diabetes, rebounded sharply in March after having sold off in the recent style rotation. Dexcom continues to post strong top-line growth on increasing penetration of diabetes patients and the anticipated launch of the G7 monitoring device later in 2022 is expected to further increase its addressable market by including less intensive diabetes management.

In terms of trade activity, we exited our position in Alibaba during the month as ongoing uncertainty around geopolitics, the threat of regulation and a domestic slowdown more than outweigh its low valuation.

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 are embarking upon what is expected to be 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 remains robust and further easing of covid related restrictions is supportive. While we expect growth to moderate in 2022, the trends underpinning the Global Thematics also continue to strengthen.

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. The regulatory clampdown has 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 Global Thematics. 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.