Market Development: September proved to be a difficult month for global equity markets. The MSCI World Index declined by 9.3% on the back of continued pressures arising from high inflation, leading to expectations that interest rates will keep rising; the continued disastrous situation in Ukraine and subsequent effects on the energy markets; continued shrinkage of the US Federal Reserve balance sheet; and the COVID lockdown in China.
Until the Federal Reserve changes its course in relation to balance sheet tightening or an interest rate increase, the conditions for risk assets will remain difficult. Recent inflation data only confirms that the trajectory is unlikely to change in the very short term unless there are major shocks to the world economic system.
Recent events in the United Kingdom, while partially home-made, show that the markets are not treating weak situations kindly – we should be prepared for more volatility to come. Valuations in equity markets outside the United States are now beginning to be attractive, while the United States still has room to fall.
The Strategic Global Quality Fund outperformed the index by 0.46% in September. The allocation effect was positive during the month (+1.63%), whilst the stock selection effect was negative (-1.05%).
The largest positive contributor (+0.72%) was the higher-than-normal level of cash during the month (6-7% on average), followed by the allocation to the Consumer Staples sector (0.35%).
There were no significant contributors (above 25 bps), although a broad selection of names contributed positively – SAP, Wolters Kluwer, Maravai, Worldline and Pernod Ricard.
On the other side, two stocks cost performance 50 bps each – IFF and SIG. We have commented on both of these stocks during recent months:
IFF is a leading player in the ingredients industry and is digesting the effect of the Dupont merger. New management was recently appointed and they are focused on extracting synergies from the combined new business.
The stock has been derated somewhat given the leverage is high at the moment (above 4x EBITDA), but outlined disposals, in addition to free cash flow, should bring this down rapidly to 3x within 12-18 months. Management is expected to enhance and upgrade various KPIs and synergy targets at the CMD in December.
SIG remains well positioned, but the valuation of the stock means that it is vulnerable to derating in a rising interest rate environment.
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.
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The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Adviser to the fund as of 14/10/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.