Quarter 3 2021 review
Hello, it's Zehrid Osmani, Head of Global Long-Term Unconstrained equities at Martin Currie and Portfolio Manager for Global European and International equities. As far as the market is concerned, it's been a quarter of mixed moves. Global equities are down 1.1%. The weakest sector was consumer discretionary, geographically, Brazil, and China were particularly weak, which dragged down Emerging Markets equities. The China weakness was related to the Evergrande default concerns in the real estate sector. The common prosperity policy initiatives and regulatory focus on anti-monopolistic behaviors, as well as conspicuous consumption, clamp down impacting the consumer sector, notably luxury goods. There were concerns around the loss of momentum in the economic leading indicators as well. At the same time as monetary policies are anticipated to move into tightening mode, a lack of follow through in approving the Biden infrastructure program also didn’t have the market gain comfort by the economic momentum.
In the global funds, Masimo, Resmed, Kingspan, Hexagon, Nvidia and Linde were notable positive contributors, Farfetch, Alibaba, Kering, Tencent, Adidas and Moncler were noticeable negative contributors alongside Wuxi Biologics and Illumina. These were stocks that were in particular hit by the China concerns. In the European funds, Nemetschek, Sartorious Stedim, ASML, Dassault Systémes, Hexagon, Kingspan, Allfunds and Partners Group were positive contributors. Most of them helped by the industrial recovery and construction sector, momentum health. AMBU, Adidas, Farfetch, THG and Moncler were notable negative contributors, with China weighing on some of these names in particular, in the luxury and sports apparel stocks.
We believe that the economic momentum is moving from recovery to expansion. This should lead to a broadening of the market leadership with a focus on earnings, momentum, and consistent growth profiles. In our view, as we move into the next phase in the economic cycle, monetary policies shift away from an accommodative mode towards more tightening, which should be expected over the next 24 months. The market is likely to remain unnerved by the expectations of rates rising sooner than previously expected, in our view. This should bring a period of higher market volatility. Inflation is still a talking point, although we don't expect a clear realization on whether inflation is transitory or more persistent, until the middle of next year. So the debate on inflation is likely to continue for some time. For us, it is too soon to draw conclusions, given the frictional inflation that economies are facing at the moment, we continue to keep an eye on wage inflation, which is the biggest contributor to persistent inflationary pressures value growth bull bear debate should remain only present as a result of this backdrop in the meantime.
Where do you see the opportunities?
Valuation discipline in this environment is important, given the rising interest rates expectations. We use high discount rates in our evaluation analysis in our funds, to ensure that we are conservative in terms of valuation attraction and to avoid stocks whose upside solely relies on the low interest rates environment that we had until now. We use stable discount rates set at 8% in terms of cost of capital, which ensures that our estimates, fair values do not reduce as interest rates rise.
In this environment, typical stocks we focus on have high barriers to entry and/or dominant market positions, which gives them pricing power, which in our view is critical to help them navigate when there's uncertain inflation backdrop, we continue to focus on stocks exposed to our eight midterm post pandemic opportunities.
Four of which are in the infrastructure front which are:
Firstly, renewable energy to decarbonize economies.
Secondly, electric transportation, which is another form of green initiatives.
Thirdly, 5G telephony to increase connectivity and
Fourth, healthcare infrastructure to upgrade facilities post pandemic crisis.
Another four of these opportunities are in areas that we have seen an acceleration in structural growth prospects.
Which are cloud computing and cybersecurity, as corporates are migrating more of their activities online.
Robotics and automation, as corporates are making their production lines more robust and their supply chains more resilient post-pandemic crisis.
Online education and online gaming, which has recruited a new customer basis during the lock-down.
And, hygiene, both food and premises hygiene.
Thank you for listening. It's Zehrid Osmani. Head of Global Long-Term Unconstrained equities and Portfolio Manager for European, International and Global equities at Martin Currie.
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