Market Development: In August, the MSCI World Index (net returns in USD) progressed 2.49%, the EURO STOXX 50 (net returns in EUR) returned +2.13% whilst the S&P 500 also increased by 2.90%. The Dollar Index (DXY Index) strengthened by 0.49% over the period, whilst the generic 30Yr Treasury yield increased from 1.90% to 1.94% and the VIX ended the month close to its 2021 low, at 16.48.
Equity markets continued their relatively stable upwards trajectory in August, despite a few specific developments contributing to short-lived volatility. First, Chinese authorities pressed on with further policy announcements, all centred around the notion of “common prosperity” and aimed at curbing certain behaviours viewed as conflicting with the government’s societal ambitions. Strict limits on video games for minors – an escalation of existing rules, was further evidence of the Chinese government’s determination to actively shaping the next phase of its economic and societal evolution.
A number of large technology companies, such as Alibaba, announced significant social initiatives, widely viewed as a direct response to the sensitive regulatory climate. While markets reacted with initial nervousness, the dip in developed market equities was quickly bought, as Chinese equities stabilised from what is likely an oversold situation.
Secondly, strong employment and inflation readings during the month set the stage for J. Powell’s Jackson Hole speech, clearly dovish compared to ramped-up expectations. The Chairman emphasised the need for further progress on the unemployment side, as well as the transitory nature of inflation readings, all of which support a gradual tapering process and the need for further evidence of economic strength before even considering changes to the policy rate.
While the market expected clearer language introducing the idea of a taper, possibly to be decided at the September meeting, such dovish language supported equities and growth stocks, and partially reversed a recently firm USD.
We view the market as being supported by strong pillars of monetary policy – fiscal policy and earnings momentum; although valuations continue to expand, all the while the countdown towards normalisation of the extraordinary monetary policy has officially started. Can equity market fundamentals improve from where they are today? We will adopt a moderately more conservative approach as we enter the last third of another strong and historic year.
The Sturdza Family Fund returned +0.25% in August. Positive results from Synopsis and Ulta Beauty supported and / or catalysed their significant outperformance during the month, while the large “tech” stocks (Facebook, Microsoft, Alphabet) also drifted upwards by high single-digit percentage points. These positive contributions were diluted by a few detractors such as Global Payments, Alibaba, Centene and Dollar Tree.
We view the dip in Global Payments as transitory and even exaggerated, as we understand that discussions surrounding long-term growth potential are legitimate, while disruption from the delta variant should be short-term. For now, we remain enthusiastic investors, particularly at current levels.
Regarding Centene, we do not believe anything has materially changed over the past month, and that the company remains an attractive multi-year investment and top position for the Fund.
Alibaba’s share price has suffered under the crackdown by the Chinese government, and current visibility is arguably low. However, the company remains unique in our view: first, through its dominant e-commerce position in one of the highest growth countries in the world, and gaining market share in Southeast Asia. Almost 50% of China’s total e-commerce retail value is purchased via Alibaba today, a staggering number highlighting the importance of the company for millions of merchants and hundreds of millions of customers.
Furthermore, to put growth in perspective, Alibaba experienced 34% year-on-year growth in China e-commerce revenue in the last quarter, even while losing some market share. In addition, Alibaba also houses the leading, and now profitable Chinese cloud-computing provider, on top of its stakes in a myriad of innovative businesses including Ant Financial, arguably one of the largest financial services companies in the world by some metrics.
At current valuations, roughly 18x earnings and 15x free cash flow and a market cap only 25% of Amazon’s, we view the price as reflecting significant fundamental risks, and conversely, little would be needed for a positive re-rating over the coming years, supporting our decision to keep the position at this time.
Finally, we find the ongoing operational underperformance of Dollar Tree disappointing, and unfortunately, few solutions are being offered by the management team to turn it around and strive towards the execution of competitor, Dollar General. We are currently evaluating the situation in light of another quarter of underperformance.
Over the month, the Fund reduced its position in Aon and Arthur J. Gallagher, and initiated a position in competitor Willis Towers Watson. The company’s share price fell significantly after its merger with Aon was abandoned and we believe it offers a compelling valuation case for a single-digit organic growth, yet stable business, operating within a consolidating market.
There are opportunities for margin expansion and significant cash generation, including a $1bn deal break fee. We also reduced the position in The Blackstone Group amid ongoing strength and valuation expansion, leaving little room for disappointment. Marginal weight trimmings were also made on well-performing companies such as Berkshire Hathaway, Nemetschek, HCA, Iqvia, Service Corp, S&P Global, contributing to the Fund’s slightly reduced equity exposure, just under 64%.
As always, we invite investors, or prospective investors in the Sturdza Family Fund to discuss the opportunities with the investment team if they would like to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact Adam or visit the Sturdza Family Fund Page >
+44 1481 742380
The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 10/09/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.