Market Development: June proved to be another negative month (with the MSCI World down 8.66%) as the correction in the equity markets continued. The S&P ended down 20% in the first six months of the year and thus we are entering the bear market territory.
The Strategic Global Quality Fund outperformed the Index by 1.4%. The concerns of the financial markets changed during the month from the worry of inflation to the worry of an economic slowdown and recession. In particular, this hit the Energy sector hard, with the oil price falling sharply, leading to falls in energy-related stocks.
Optimism is thin given the combination of rising interest rates, reduction in central bank balance sheets, wage pressures on companies, China COVID lockdowns as well as the horrible war in Ukraine. It is highly likely that this war will last some time given Russia has no interest in not pursuing its aim of conquering all of Ukraine.
It is now becoming clear that the Western economies will suffer greatly from the economic sanctions given that the Russian gas supply to Europe will most likely be cut off completely. Putin is also weaponising the oil market.
There exists a real risk of a major economic crisis in Europe this winter. The political leaders will have to choose between crises at home or giving up on Ukraine… In this environment, we will remain cautious in portfolio construction.
The outperformance of the Fund was driven by allocation effect (0.9%) as well as stock selection effect (0.7%) and also currency effect (0.2%) – an unusual occurrence in the strategy.
The biggest driver of outperformance was the overweight allocation to the Consumer Staples sector (1.1%), followed by the Materials sector (0.6%) and the underweight in the Consumer Discretionary sector (0.46%).
On the negative side, the overweight allocation to the Energy sector hurt (-0.44%) as well as weak stock performance in the Healthcare sector (-0.43%).
Examining the stock level attribution, one can observe that the largest driver of the stock selection on the positive side was McDonald’s (+0.76%). McDonald’s is executing its strategy of staying relevant to the consumer well (simplification of the menu as well as quality improvements) with lessons learnt during the COVID period.
However, McDonald’s is a beneficiary of recessionary trends as people trade down when eating out and thus is normally very stable during difficult economic times.
On the negative side, Siemens Healthineers (-0.39%) had a difficult month as it fell sharply on the back of a profit warning by Getinge of Sweden. Getinge operates in the short order cycle part of the hospital equipment market and often is the early indicator of developments in the sector.
The demand for MRI scans as well as cancer radiation treatment is still growing around the world and is also one of the main profit drivers for hospitals in the United States. The outlook for Siemens Healthineers products should remain good for some time to come. We are also yet to see the benefits of the Varian transaction.
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 11/07/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.