Defence is the best offence

Market Development :The market recovery we witnessed during July did not last into August, as the markets turned during the second half of the month. The markets were up 3.5% in the middle of the month but subsequently fell, ending August down 4.2%. Strong global inflationary pressures have led the central banks to adjust their monetary policies by raising interest rates.

KOMMENTAR DES FONDS
13 Sep 2022

Market Development :The market recovery we witnessed during July did not last into August, as the markets turned during the second half of the month. The markets were up 3.5% in the middle of the month but subsequently fell, ending August down 4.2%. Strong global inflationary pressures have led the central banks to adjust their monetary policies by raising interest rates.

The economic backdrop in the United States means that wage inflation is now strong given the shortage in the labour force, compounded by people exiting the labour market during COVID. It has now become clear that the Federal Reserve has to create “pain” in order to reduce the wage pressures, so has to reduce inflation – we are of the opinion that this will result in an economic recession.

The situation in Europe remains challenging as Russia has now closed the Nord Stream 1 pipeline, meaning gas supplies are substantially reduced. Whilst governments can put measures into place to ease consumer discomfort, life for smaller companies is more challenging.

We should expect more supply chain issues as companies close down their activities, with food shortages also likely to arise. Global central banks are thus raising interest rates at exactly the same time as the economy is facing significant external shocks – not a good mixture.

Market Outlook

We may sound like a broken record, but a cautious view of the market outlook is to be maintained, especially in the United States. The combination of rising costs (energy as well as labour), higher interest costs on debt, and slowing demand can not be good for corporate earnings – this still seems to be ignored by the United States stock market which remains expensive in absolute and historical terms.

We are now into the seasonally tricky part of the calendar year and one should expect heightened volatility during this period. The Federal Reserve increased the run-off of the Treasury and Mortgage Backed Securities in September (now $95Bn) whilst for technical reasons, there wasn’t much of a squeeze in liquidity during recent months. The conditions are setting themselves up to be very similar to December 2018.

Fund Performance

The  Strategic Global Quality Fund performed broadly in line with the index. The allocation effect was positive during the month (+0.77%), whilst the stock selection effect was negative (-0.88%).

The largest detractors were the Materials (-0.51%), Healthcare (-0.33%) and Industrials (-0.28%) sectors. Positive contributions were seen from Consumer Staples (+0.29%) and Information Technology (+0.25%).

Individual Stocks

There were no major positive contributors this month given that JDE Peets (+0.16%) and Global Payments Networks (+0.14%) were the largest movers.

The Fund recently re-established a position in JDE Peets as it is clear that the Consumer Staples sector is, on the whole, able to price out the cost pressures that it faces. JDE Peets is no exception, with double-digit price increases for the coffee products that it sells. JDE Peets is the world’s second-largest producer and retailer of coffee, with consumption expected to continue growing for the foreseeable future.

Global Payments Networks in the United States, one of the leading payment processors, rebounded on the back of better-than-expected results. The trend of payments moving away from cash towards electronic has led this segment of the market to continue growing steadily, even though it is seen as old technology. The company is trading on a P/E of 14.0x for 2022 and 12.3x for 2023 which is attractive in the current environment.

On the negative side, SIG (-0.31%) and IFF (-0.26%) were the main detractors. SIG gave up some of its relative performance this month – we discussed this company in detail last month.

The Fund has held a position in IFF (International Food and Fragrances), a competitor to Givaudan and Symrise, for some time and so far the stock has not really performed due to poor execution and aggressive M&A – the latter resulting in the Dupont merger.

New senior management has recently been appointed and the focus is on delivering the cost and revenue synergies available to the new company as well as de-gearing the balance sheet via some minor disposals. The rationale for the large transaction seems to have been validated by the recent announcement of the proposed DSM/Firmenich merger.

IFF will hold a capital market day in December when more details will be given. Given the underlying fundamentals of the industry (oligopolistic in nature and very visible revenues), we continue to believe that all companies in the sector should do well over time.

As always, we invite investors and prospective investors, to get in touch should you wish to discuss the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the fund as of 12/09/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.