During the quarter, we purchased a new stock in the healthcare space: Veeva Systems.
It is Zehrid Osmani, Head of Global Long-Term Unconstrained Equities at Martin Currie, with a quarterly update on our global funds’ performance.
As a reminder, we manage high conviction concentrated funds, focusing on sustainable quality growth stocks that we hold for the long term. We have a strong focus on ESG, which is embedded in our fundamental analysis.
The three topics we want to cover:
- Fund performance
- Transactions during the quarter
- Outlook update
Q3 has been a strong month for the funds - outperforming by 2.3% gross*. Strong performance has come from Tech, Consumer Discretionary and Industrials in particular. Healthcare has been the notable detractor, giving up some of its strong performance YTD as the market moved away from defensive names and favouring more cyclically exposed sectors. The market continued to rally in the quarter, up +8.3% in US$ terms*, driven by a supportive results season, where many sectors and stocks beat expectations. Expectations had been brought down sizeably ahead of the reporting season, but it is still encouraging that we have now moved to a more supportive earnings momentum picture after the sizeable downgrades seen since March as the pandemic crisis unravelled. The market rally has been fuelled by the strong improvement in economic activity as economies came out of lock-down - leading indicators have been recovering sharply during the quarter pointing to a cyclical recovery, which has supported the market. The debate around shape of economic recovery however remains valid in our view, and uncertain at the same time.
During the quarter, we purchased a new stock in the healthcare space: Veeva Systems. Veeva is at the forefront of bringing tailored software to drug development and commercialisation. Serving a regulated end market with mission critical products provides the company with high barriers to entry. We estimate that Veeva is only 5% penetrated in its market opportunity** - a market that is growing due to the structural trend towards more complex and personalised therapeutics which requires greater coordination between agents across the healthcare system. We believe the company has an attractive growth profile, and high returns on invested capital which we expect to continue to improve significantly over time.
We funded our purchase of Veeva through the sale of ADP** given our concerns of long-lasting negative headwinds from the underlying deterioration in labour markets as a result of the pandemic crisis.
Looking ahead - outlook update
We are still in the midst of the pandemic crisis with its many challenges it is bringing to economic activity. Uncertainty on the shape of the recovery remains high, especially given the underlying deterioration we are seeing (and continue to expect) in the labour market which will act as a dampener on the recovery. We continue to forecast a gradual economic pick-up, rather than a V-shaped recovery, with a return to previous activity level only by 2022.
We predict that economic leading indicators will start to lose momentum over the months to come, after an initial sharp rebound. Fiscal stimuli, given their magnitude, have played an important role in the equity markets rebound.
The important focus will be in the speed of channelling these sizeable fiscal stimuli into the real economies, which we will need to continue to assess.
On the corporate earnings front, there is a more supportive earnings momentum in the market, notably in cyclical-exposed sectors, even if still fragile and highly dependent on shape of the economic recovery. On the valuation front, equities still provide an attractive earnings yield given the very low bond yields environment we are in.
We believe that the low rates environment will be prolonged, given the lack of inflationary pressures, the strong underlying deflationary pressures, and the lack of growth in the long term.
Style leadership will remain an important talking point, with the Value-Growth valuation gap remaining at close to extremes; we think this to be too short term a concern for us to worry about.
On the geopolitical front, tensions between China and the US, and China and the Rest of World, will remain centre stage which brings another dimension of unpredictability. The US elections and UK Brexit emergency talks are the two near term focal points for the market – both events have the potential to bring increased volatility.
On the US elections, both candidates are running with pledges of sizeable additional infrastructure spending to support the economic recovery, although we note that Biden’s plan is more frontloaded, and therefore potentially more supportive. It is also more focused on green infrastructure initiatives, and decarbonisation of the economy, which carries long term structural growth opportunities. Key will be whether the US elections bring a clean win for either party across both the Senate and House of Representative, that could enable more rapid policy implementation. There is a strong probability that election results will be protracted and lead to claims of irregularities in the voting procedures, which could unnerve the markets.
On the UK Brexit talks, time is increasingly running out for last minute compromises, and there is a higher likelihood of a no-deal Brexit which will bring more downward pressure on the UK economic momentum in our view, and to a lesser extent the EU economic momentum.
Given the plenty uncertainties, and the low-growth environment, with the low bond yields environment being a reflection of all of these, we believe that our approach of focusing on resilient sustainable business models, and companies with strong balance sheets and attractive growth and returns profile is warranted - whilst our long-term time horizon ensures that we capture the compounding characteristics often undervalued by the market that these businesses emanate.
Focusing our research on our long-term megatrends (Demographic Changes, Future of Technology and Resource Scarcity) ensures that the portfolios are appropriately positioned to harness attractive long-term growth opportunities for the benefit of our investors.
* Source: Martin Currie and Statpro as 30 September 2020. The Legg Mason Martin Currie Global Long-Term Unconstrained Fund shown in US$. Figures are quoted gross of fees. If the effect of fees and other such expenses where included, performance would be reduced. The figures provided include the re-investment of dividends. Please note that this strategy is unconstrained by any benchmark. We show it against the MSCI ACWI for illustrative purposes only.
** Source: Martin Currie internal estimates as at 30 September 2020
Regulatory information and risk warnings
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