Market Review

Global equities posted moderate gains over August. Strong corporate earnings data outweighed concerns central banks might start tapering pandemic support measures. While several emerging markets have already raised interest rates, central banks in G7 nations have yet to follow suit. In a speech at Jackson Hole, Chair of the Federal Reserve Jay Powell indicated that while tapering may begin before year end, doing so too quickly could have a destabilising effect. This relatively dovish commentary, meaning the Fed is unlikely to take strong action, enabled financial markets to shrug off rising transmission rates of the Covid-19 Delta variant, as well as ongoing supply chain disruptions and a slowing in the Chinese economy.

At a sector level, Financial stocks outperformed as investment banking revenues surged past pre-pandemic levels. Information Technology and Communication Services also did well, reflecting investors’ return to quality stocks delivering consistent earnings growth. Correspondingly, Energy and Materials stocks lagged the broader market as commodity prices weakened.

It was a volatile month for commodities. Brent crude slipped to 65 USD a barrel, amid concerns the Delta variant would slow economic growth, before recovering to end the month around 72 USD a barrel. Similar concerns hit iron ore, with prices dropping to just above 130 USD a tonne, a level last seen in December 2020. Copper also fell, touching a five-month low.

Portfolio Review

The Trust’s equity portfolio outperformed its benchmark in August, delivering a NAV total return of 4.7% vs the benchmark’s 3.3%.

Stock Spirits Group (SSG) made the biggest positive contribution. The drinks company announced an agreed takeover by private equity company CVC Advisers at a 41% premium. We believe the bid price is a fair one, which recognises the significant value created since the current management team took over in 2016, whilst also leaving longer term upside for CVC to further invest and grow the business. The acquisition is one in a long line of recent UK deals, reflecting the attractive valuations of quality businesses in the region, particularly relative to the US.

Agilent also boosted returns. The maker of life science tools reported strong Q3 results raising full year earnings guidance. The company’s core biopharmaceutical market remains stable, continuing to benefit from Covid-19 tailwinds. However, a broader economic pickup is also bolstering its chemical and energy divisions.

LVMH made the weakest contribution to performance. Increasing regulation in China has primarily affected technology stocks, but promises from President Xi to deliver “common prosperity” through income regulation and redistribution have also affected the entire luxury sector. LVMH shares fell over 11% on the news. We anticipate any impact is likely to be temporary in nature given the wide appeal and strong demand drivers for LVMH’s products in China.

Visa also weakened returns. Shares in the payments company fell after the Biden administration endorsed reopening a proposal which mandated greater network choices and capped the fees retailers pay card companies. While the story is likely to sustain bouts of volatility in the shares, Visa’s scale continues to be one of the drivers behind its dominant position.

Market Outlook

August has been a contradiction month for equity markets. On the one hand, global stock markets have continued to make modest gains, with many regions hitting all-time highs. Set against this, the Federal Reserve is indicating that it plans to dial back monetary stimulus, China’s economy is visibly slowing and the Delta variant of Covid-19 continues to spread rapidly.

Covid-19’s ebb and flow continues to impact stock markets, albeit to a lesser extent. In part this is down to vaccines which have enabled countries with high vaccination rates, such as the UK, to handle surging infection rates without hospitals becoming overrun. In contrast, the delta variant’s rapid spread in China and other emerging markets, where vaccination rates are much lower, is putting much greater strain on local economies and healthcare systems. This is why the economic recovery from Covid-19 will be uneven, with emerging markets likely needing many more months to return to normality. In addition, aside from the most heavily impacted sectors such as airlines and hotels, most well-run companies have become much more adept at dealing with Covid-19 related disruption, for example by shifting their business models further into the digital realm. This has allowed them to operate much closer to normality even with social restrictions in place.

Despite US equities hitting all-time highs and the economy seemingly recovering strongly, the monetary and fiscal environment remains very supportive. Even with a tapering of asset purchases, interest rates remain very low, whilst the passing of a large infrastructure bill will add even more stimulus to the economy. Against this backdrop of strong demand and ongoing Covid-19 related disruption, it is not surprising that we are seeing significant cost push inflation as supply chains struggle to cope. Most companies have been able to pass these costs on to customers but the longer this situation persists the harder this will become.  Ensuring portfolio holdings have the management, product offering and pricing power to offset these concerns longer-term remains a priority in all our investment cases.