Market Development: The equity markets around the world continued their October rally into November, with the MSCI World rising by 6.95% as sentiment improved from the oversold situation at the end of September.
The war in Ukraine remains while central banks continued to increase benchmark interest rates in their battle with high inflation. The Federal Reserve in the United States increased rates by 0.75% to 3.75% which was matched by the European Central Bank also raising interest rates by 0.75% to 2.00%.
Despite the recent rally, we struggle to view the market positively just yet, given the fact that the lag effects of the increases in interest rates are still to really come home. That said, we are continuing to see the damage being done in various parts of the economy; the crypto space obviously and housing markets in many places around the world have now also rolled over.
The liquidity in the financial markets is still tightening as the QT of the Federal Reserve continues. Wage pressures are high and increasing as time goes by, given the reduction in living standards. We believe that the US economy is already on the path to recession.
The outlook for 2023 remains complicated, as none of the factors have resolved themselves. Companies are likely to be very cautious for 2023 when they make their full-year statements in the early part of the year.
It is likely to be a year of two halves – with further downside volatility as the recession shows itself in the first half. Once the central banks realise that they have done enough, the markets will look forward to the recovery – hopefully in the second half of the year.
The Strategic Global Quality Fund gained 5.56%, slightly underperforming the MSCI World Index in the strong market. The main cause behind this was the negative selection effect seen in the Information Technology sector costing -1.01% to overall attribution.
On the positive side, three stocks were important to attribution this month: Rheinmetall in Germany (0.49%), SBM Offshore in the Netherlands (0.45%) and Cooper in the United States (0.35%).
Rheinmetall is a German company with positions in automotive, electronics, engineering and defence systems. It recently announced that it would buy a Spanish manufacturer to reinforce its position in the defence space. The company is well positioned to benefit from the expected increase in defence expenditure as a result of the war in Ukraine.
SBM Offshore posted good interim results combined with a further order for a new Floating Production Storage and Offloading (FPSO) system. The offshore oil industry is undergoing a renaissance, given the world’s need for fuel resources over the foreseeable future.
Cooper, a leading player in the contact lens area and equipment for gynaecologists, bounced back upon the stabilisation of the macro situation in the United Kingdom, in addition to the weakening of the United States dollar.
On the negative side, the top detractors were FIS (-0.71%), Medtronic (-0.40%) and GPN ( 0.28%).
FIS posted some very disappointing results with a weaker-than-expected top line (it is losing market share) combined with higher personnel and insourced services. The market was very disappointed by these results as it would appear that the company is undergoing a severe squeeze which is hard to offset.
A new CEO has been appointed, although an internal candidate, whilst a cost-cutting programme was also announced – the latter smacks of panic and buying time. We are evaluating our view on this company but have already reduced our position by 50%. Given GPN operates in the same space, it fell in sympathy.
Medtronic continues to disappoint as evidenced by its recent results – we still feel the company is well positioned longer term.
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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 11/12/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.