Market Development: n October, the MSCI World Index (net returns in USD) returned +5.66%, the EURO STOXX 50 (net returns in EUR) appreciated 5.45%, whilst the S&P 500 Total Return bounced by +6.91%. The Dollar Index (DXY Index) retreated by 0.11% over the period whilst the generic 30Yr Treasury yield came down to 1.93% from 2.04% and the VIX tapered down to reach a relatively low 16.26 from 23.14 a month earlier.
Following a short retreat in September and early October, the market rebounded once again to reach a new historical high by the end of the month. With around 50% of the MSCI World members having reported their quarterly earnings, the first takeaways are that the positive earnings surprises continue to be strong by historical standards, but are slowly normalising when compared to the post-COVID period.
In fact, at current levels, the present 12% aggregated surprise would register as the smallest since the second quarter of 2020. In broad terms, revenue surprises are following the same trend, converging towards the levels seen in Q2 2020, leaving ammunition for both the bulls, touting the absolute level; and the bears focused on the second derivative.
Naturally, the market’s heavy reliance on Tesla meant that this large technology firm’s strong deliveries and associated stock performance provided a jolt to capitalisation-weighted indices. However, Apple and Amazon’s relatively subdued numbers, largely the result of supply chain and cost pressures, counteracted some of this towards the end of the month.
Overall, these results are supporting the equity market, as it faces more uncertainty around China’s real-estate sector and its slowing GDP growth, yet investor expectations were clearly higher than the analysts’, and any sign of weakness is sanctioned by important post-earnings reactions.
The topics of supply chain stress and energy shortages remained front of mind during conference calls, with many companies attributing sales shortfalls to procurement issues, from everyday consumer goods to high-tech components, sparking short-term investors’ nervousness. Governments are increasingly looking to address these issues, from extended operating hours in Californian ports to talks of increased gas production in Russia and a return to a more market-friendly tone in the Spanish electricity market – all positive news in our view.
Further, we see the first signs of normalisation in a few categories such as specific semiconductors, where lead times have almost stopped increasing. While this phenomenon has contributed to market share shifts and real economic headwinds in certain cases, we continue to view the vast majority of these phenomena as transitory and supportive of more investment spending, a positive for real GDP growth down the line.
While the market once again showed its ability to bounce back quickly after any drawdown, we continue to monitor important macro developments, including those out of China, for any hints of a change in regime.
Currently, we remain optimistic about the future for equity markets – especially so, for our investee companies, and look to capitalise on opportunities to add to or complement our existing portfolio with other attractive investments when they present themselves. We view the secular trends underlying the growth of our portfolio as only gaining in strength, and reasonably-priced companies involved in those will likely continue to gain in value on their own merits.
The Sturdza Family Fund returned +2.22% in October. With the earnings season in full swing, much of the performance on the equity side was a direct consequence of investors’ perception of our companies’ results.
In terms of contributors, Microsoft led the charge after publishing another strong set of numbers, outperforming high expectations once again. Intercontinental Exchanges also delivered strongly and supported its longer-term investment case by showing good traction in its recently formed mortgage business.
Our managed health companies (UnitedHealth, Centene and Anthem), an important long-term investment theme for the Fund, also contributed handsomely after posting strong earnings, upgrading guidance and demonstrating their strong cost management.
In addition, Merck also had a strong month following its announcements on the efficacy of Molnupiravir for COVID and confirmation of normalising sales of its blockbuster named Keytruda. We applaud Merck’s partnership with the UN’s Medicines Patent Pool to license the drug to other manufacturers who can then produce and distribute it in low and middle-income countries, a significant positive impact to reduce COVID mortality while protecting the limited healthcare infrastructure.
On the negative side of the ledger, the payments sector was a significant detractor as more concerns surrounding potential share losses to new entrants exacerbated the recent weakness. This affected Worldline in particular, which published a set of arguably underwhelming quarterly numbers, but also Global Payments and Fidelity National, both of which are yet to report, but dropped on the back of Fiserv’s report.
Visa and MasterCard were similarly caught in the flows, even though their results were largely positive and the strength of their long-term positions are clearer in our view. We believe that in many cases investors are overly concerned about competition in this large and growing market, making many of these companies historically cheap, while still growing their revenue and earnings lines by high single digits, at high cash conversion rates while supported by strong balance sheets.
In October the Fund exited its remaining positions in Lowe’s, Aon, Service Corp. and Roche. We also further reduced our position in Blackstone, via the sale of call options, after a strong rebound and stellar earnings pushed the stock above our level of comfort.
The Fund also closed its small position in Anthem following a strong run in a short period of time, in order to maintain overall exposure to the managed care sector at an acceptable level. In addition, the Fund closed some profitable short put exposures that offered virtually no more prospective return opportunities.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.
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The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 03/11/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.