Market Development: The stock markets around the world rose sharply during July as they recovered from a technically oversold situation and a softening of expectations concerning interest rate rises. The United States Federal Reserve and the European Central bank increased their rates at the end of the month.
Oil prices peaked in June at close to $120 and then began to decline, continuing through July, partially aided by the release of strategic oil reserves by the United States government. This allowed the 10Yr US government bond yield to decline from 3% to 2.65% during the month and accordingly, long duration growth sectors of the equity market, particularly the Technology sector, performed well.
We have not changed our cautious view regarding the outlook for the economy or stock markets. The rally we saw in July is a classic bear market rally. The war in Ukraine is causing many unforeseen consequences, accelerating a fracturing of the world economic system. Russia continues to focus on taking control of Ukraine.
The energy crisis in Europe could lead to a severe recession this autumn, unless the Russian gas tap is turned back on. Inflation in the United States means that the Federal Reserve will have to raise interest rates more in order to cool the economy.
The combination of rising costs (energy and labour), higher debt costs and slowing demand can not be good for corporate earnings – which seems to be ignored by the stock market and remains expensive in absolute and historical terms.
The Strategic Global Quality Fund rose by 5.86% during the month. Relatively, allocation effect cost the Fund 2.24% and currency effect 0.38%, while stock selection was positive (0.62%). The main drag on performance was the overweight in the Consumer Staples sector (-0.89%) in addition to the underweight positions in the Consumer Discretionary (-0.56%) and Technology sectors (-0.54%).
Given that we normally only comment on those with more than 50 basis points of contribution, there is only really one stock that was a specific contributor to performance this month – SIG Group in Switzerland. This company produces packaging for the drinks sector; with a particularly strong position in milk packaging. The market is effectively dominated by Tetrapak (privately owned) and SIG. Most of its revenues are recurring in nature, given its clients are global food and drink producers.
Earlier in the year SIG announced the purchase of IPN Scholle in the United States – the market leader in “bag-in-box” and spouted pouches packaging. The new combination will mean a better geographical spread (SIG was relatively weak in the US market) and it is also well positioned to benefit from the trend towards more sustainable packaging (as paper takes the market share from glass and PET). We believe this business model to be very strong while revenues are not really affected by the economy. The Fund first established a position in the stock in May 2020 and is one of our top holdings.
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 Lofoten Asset Management in their capacity as Investment Adviser to the fund as of 18/08/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.