Following a record half-year fall in equities over the first half of 2022, July delivered refreshingly positive returns. Volatility remained high as the market continued to balance weak economic data with the effect that weaker economic activity will have on inflation and the path of interest rates. Whilst inflation remains high in the near term, the longer-term expectations of falling inflation and potentially lower interest rates resulted in a positive month for global equities. In particular, longer duration ‘growth’ companies performed well. Chinese equities had a difficult month as COVID-19 restrictions were reintroduced, as well as the on-going geopolitical concerns. The MSCI All Country World Index ended the month up 6.8%. The Company’s NAV Total Return was 7.1%, the Total Shareholder Return was 7.6%.
Given this backdrop, Technology and Consumer Discretionary sectors outperformed as they regained some of the big losses seen over the first half of 2022. Defensive sectors, particularly Telecommunications, Healthcare and Consumer Staples lagged the market.
Within the Company’s portfolio, Vulcan, SGA and Sands were the best performing stock pickers over the month as they are more focused on growth companies and have more exposure to US technology and consumer discretionary sectors. Stock pickers whose portfolios are value oriented or defensive in their positioning had the weakest performance and this included Jupiter, GQG and Veritas.
At a stock level, the biggest contributor to relative performance was Petroleo Brasileiro SA (state-owned Brazilian multinational petroleum corporation held by GQG).
The company delivered strong quarter end earnings results driven by elevated oil prices, improved margins in its natural gas and fuels segments and divestments of two offshore fields. Other emerging market stocks such as MercadoLibre Inc (LatAm e-commerce, held by SGA and Sands) and HDFC Bank Limited (Indian bank held by SGA and GQG) were amongst the portfolio’s top contributors. On the back of Technology and growth stocks regaining ground over July, the Company’s portfolio was disadvantaged by not holding Apple Inc (US multinational technology company) and Tesla Inc (US technology and automotive multinational). Combined, these stocks make up over 5% of the benchmark and have seen their share prices rise by around 18% and 32% respectively over July.
From a regional perspective, the US was the only major region to outperform. Positive contributors to outperformance there included United Rentals Inc (US industrial equipment rentals company held by Lyrical) which reported strong earnings and saw good customer activity in the US despite the challenging economic backdrop, and Autodesk Inc (American design software company held by SGA) which gained over 25% in July as market expectations rose ahead of its August earnings release and the stock gained on the back of the broader buying of Technology stocks. On the other hand, Baidu Inc (Chinese multinational technology company held by Black Creek) was a notable China holding that detracted from performance. The stock had a difficult month on the back of rising concerns over reintroduction of COVID-19 lockdowns in China and other geopolitical tensions.
Stock selection in the Financials sector was positive with positions in Private Equity firms KKR & Co Inc and Carlyle Group Inc (both held by Vulcan) performing well. Additionally, State Street Corporation, a large global custodian bank held be Metropolis, contributed to outperformance as its shares began to recover from earlier weakness.
As of 31 July 2022, gross gearing stands at 8.2%, below our long-term target of 10%, as we maintain a more cautious outlook on equities despite this month’s positive moves.
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