The data shown is not constant over time and the allocation may change in the future. Totals may not sum to 100.0% due to rounding. All data source Allianz Global Investors unless otherwise stated.
Data as of 30.09.2019
Data as of 30.09.2019. Excludes Cash
|Europe ex UK||23.5|
|Pacific ex Japan||5.7|
Data as of 30.09.2019. Excludes Cash
In aggregate, global equities made modest gains in September, recovering from their steep August decline. Once again, interest rate cuts from the US and European central banks, as well as signs that US-China trade relations might be improving, helped to improve investor sentiment. However, global economic data remained lacklustre, with US manufacturing notably slipping into contraction territory.
At a sector level, Financials performed the best, helped by rising bond yields. There was also a marked shift in investor positioning: stocks which had performed consistently well year-to-date saw pullbacks, while stocks valued at lower multiples rallied strongly. This rotation out of momentum stocks into value names has largely happened as repositioning within individual sectors rather than a wholesale shift out of higher momentum sectors, although the lower-momentum Energy and Utilities sectors also outperformed.
Such moves are often driven by sharp improvements in economic sentiment, yet this remains weak. Sterling strengthened over September, following parliament’s move to block a ‘no deal’ departure from the European Union on 31 October.
An attack on two oil plants in Saudi Arabia oil caused prices to surge 20% as a result, with Brent crude peaking at 70 USD a barrel. This later eased to under 60 USD, as Saudi Arabia pledged to restore output by the end of the month.
The Trust’s NAV rose 1.63% against a benchmark return of 1.61%. This outperformance was driven by strong stock selection in the Industrials and Health Care sectors, offsetting moderately weaker stock picking in Consumer Goods and Consumer Services.
As well as being the portfolio’s best-performing Industrials stocks, Tyman and Sthree made the largest positive contributions to returns overall. Both companies benefitted strongly from the market’s rotation towards more lowly-valued stocks, rallying almost twenty per cent. We saw particular benefit from our position in Tyman, to which we had added, following an excessive price move after soft H1 results.
In addition, SThree delivered a solid Q3 trading update. The STEM (science, technology, engineering and mathematics) focused recruiter has been overly punished for its UK exposure, but with strong fee growth in Europe and the USA, this is an increasingly small part of the business. By focusing on contract workers in a specialist niche, SThree is able to weather tougher conditions better than peers.
UnitedHealth Group has made the largest negative contribution to returns. The US-based provider of integrated health care has suffered as a result of vocal support for Universal Healthcare from a range of Democratic Presidential candidates. However, current valuations are pricing the roll-out of this policy as an almost certain event. Given the previous difficulty of passing “Obamacare”, we view this discount as excessive and maintain our position.
The Cooper Companies have also eroded returns. The maker of contact lenses and specialist healthcare items reported Q3 revenues which came in moderately below expectations, as well as softer full year guidance. Underlying demand trends remain strong and we have added to our position as a result.
Our conviction in Covestro has weakened as the specialist plastic manufacturer’s growth targets become less certain. As a result, we have used the recent share price rally to sell our holding.
We have initiated a position in International Flavors & Fragrances. IFF operates in an oligopolistic industry with stable growth, high returns and a yield of 2.5%. The company has de-rated as a result of slower growth and the expensive acquisition of Frutarom, which has given an attractive entry point.
October’s weak US manufacturing data mean the US now joins China and Europe in a global industrial contraction. Having previously bucked the trend, the trade war’s effects are now being felt at home. The slowdown is already weighing on Industrials and Materials stocks, but a sustained manufacturing downturn may spread to as yet resilient Service sectors.
In the face of this, central banks are attempting to stimulate demand. September saw the US Federal Reserve and the European Central Bank cut rates by 0.25% and 0.5%, respectively. President Trump castigated Chair Powell’s relative restraint, but Mario Draghi’s own message was clear: “Now is the time for fiscal policy to take charge”. With the Federal Reserve suggesting further cuts are unlikely, there are genuine question marks over what more monetary policy can achieve.
A US-China trade resolution therefore is one of few tangible sources of potential economic stimulus. Yet despite positive rhetoric, President Trump’s actions have been consistently antagonistic. Recent reports suggest the US is now considering limiting investor flows into China, a substantial escalation beyond trade tariffs.
Even so, equity valuations remain close to all-time highs. Indeed, the recent value rally showed that investors had simply come to view these stocks as too cheap. However, the economic growth which would truly boost value stocks remains elusive, and valuation multiples continue to reflect a preference for non-cyclical growth.
This contradiction between valuations and fundamentals will be a key driver of volatility over the coming months. We have positioned the portfolio accordingly, consistently reducing our exposure to stocks with overextended valuations and adding to those on more reasonable multiples. Consequently, active stock selection continues to be the main long-term driver of returns, despite recent headwinds.
active stock selection continues to be the main long-term driver of returns, despite recent headwinds
This is no recommendation or solicitation to buy or sell any particular security.
|NAV (debt at fair value)||1.5||9.2||6.0||38.5||72.8|
Source: Thomson Reuters DataStream, percentage growth, mid to mid, total return to 30.09.2019.1
|NAV (debt at fair value)||6.0||9.7||19.1||26.6||-1.4|
Source: Thomson Reuters DataStream, percentage growth, mid to mid, total return as at 30.09.2019.1
1Past performance is not a reliable indicator of future returns. You should not make any assumptions on the future on the basis of performance information. The value of an investment and the income from it can fall as well as rise as a result of market fluctuations and you may not get back the amount originally invested.This investment trust charges 70% of its annual management fee to the capital account and 30% to revenue. This could lead to a higher level of income but capital growth will be constrained as a result.
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