The Strategic Europe Quality Fund returned -0.20% in January, outperforming its index by 1.06%. The main contributor to return in January was the healthcare sector due to the Fund’s relative overweight and to positive stock selection. The materials sector also performed well.
The main detractors were the Fund’s underweighting in the Utilities sector and stock picking for the consumer staples sector; although this was largely offset by the Fund’s relative overweight to the sector. The best performing sector for the index over the month was by far the utilities sector; the energy, materials and consumer discretionary sectors were the worst performing sectors.
At a single stock level the best performing stock for the Europe Quality Fund was Lonza, there were no significant detractors for the period.
The Strategic Global Quality Fund returned 1.88% in January, outperforming its index by 2.49%. The majority of alpha generated came from strong stock selection, particularly for the industrials and healthcare sectors. Sector allocation was also strong, the Fund’s relative underweight to the energy and financial sectors helped, and its overweight to the consumer staples sector was also noteworthy.
The only small drag was the Fund’s relative underweight to the utilities sector. The best performing sectors for the index over the month were the utilities and information technology sectors; while the worst performing sector by far was the energy sector – materials and financials were also weak.
The best performing stock for the Strategic Global Quality Fund was McDonald’s, while the worst performing stock was Shiseido.
The outlook for the world equity markets in 2020 is rather clouded in the Investment Adviser’s view. The Team believe there is little concern for valuations; the top line is all that matters, while true earnings seem irrelevant. Corporate gearing is at an all-time high while monetary conditions are loose. There is a complete disconnect between the stock market and the economy.
Looking forward, it is clear that the United States and United Kingdom have understood that the fiscal side of the equation needs to be engaged more, leading to a fusion of monetary and fiscal policy. The labour share of profits needs to be improved in order to not have revolutions in the street – this trend has started but it has much further to go in the Investment Adviser’s opinion.
This combined with the fact that the world economic system is fragmenting around the Americas and China blocks means that profitability margins will come under pressure given that there is little pricing power, especially in things which are not consumer related.
The strategic positioning of Europe is unclear given that Brexit is now a reality. The US Presidential election will need to be closely followed. In the event that the Democrats win, there will likely be increased volatility. The impact the coronavirus will have on global growth has yet to be fully realised. The Investment Adviser suspects that 2020 will see much more volatility than seen in recent years, especially in the second half.
The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the funds as of 14/02/2020 and are based on internal research and modelling.