Market Development: In February, the market declined by over 2.5%, mainly during the second half of the month with Europe and the United States underperforming while Japan outperformed.
Although recent events have dominated the headlines, the early part of the month focused on the rising inflation debate and potential Central Bank actions to address it. Of course, the Russian invasion on 24th February changed the whole debate, although the market’s sharp sell-off only really began in March.
The impact of the Russian invasion of Ukraine will take time to unfold, and no doubt will have more ramifications than we see today. At this stage, it seems unlikely that this conflict will be resolved soon, given the bravery of the Ukrainian people and their desire to remain an independent country. The number of refugees leaving Ukraine will increase whilst many people are also leaving Russia, given that the Russian economy will be significantly disrupted by the sanctions imposed on it by the West.
The energy crisis is now well understood, but this will be combined with a food crisis, given the important role that Russian and Ukrainian farmers play in the wheat market. That said, the Ukrainian economy exports many things which form part of industrial supply chains, and we expect shortages will occur across a range of industries as a result.
The above turmoil, unless resolved quickly, can only result in a consumer economic recession in the West. Historically, periods of war have been positive for stock markets given that governments often aggressively expand their expenditures. That said, given the size of the energy shock, it may be different this time around. Under all circumstances, the markets will remain extremely volatile until we have a clear line of sight.
The Strategic Global Quality Fund underperformed the benchmark by 1.0% during the month due to poor stock selection. Two stocks, in particular, dragged on performance – Fidelity National and Meta (Facebook), together costing about 1.7% in alpha.
Fidelity National fell sharply on the back of slightly disappointing numbers – in our view, this is an overreaction given that the slowdown in consumer expenditure growth rates is not unique to them.
Meta declined sharply on the back of disappointing user numbers, particularly in relation to Facebook and in addition to comments that TikTok was hurting its business – once again we take the view that this is an overreaction given the stock was not expensive before the results. Current sentiment on both stocks is extremely poor and this is the time to add to the positions.
As a result of the war in Europe, combined with the decline in the growth segment of the United States market, we have reduced the Fund’s allocation to Europe for the benefit of the United States. This means that the allocation to the United States has increased to over 65% over the last few weeks as the opportunity arose to buy some attractively priced quality growth stocks (Moodys, Themofischer and Paypal).
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 11/03/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.