SUMMARY
- Global equities were volatile in August but ended the month higher in local currency terms, as inflation continued to slow and economic data remained fairly positive.
- The technology sector underperformed, with several semiconductor stocks weaker.
- The Portfolio returned -1.3% in August, in line with the benchmark, as a weaker US dollar detracted from global equity returns in Australian dollar terms.
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COMMENTARY
Global equity markets were volatile in August, falling steeply at the start of the month upon higher Japanese interest rates and weak US labour market data that raised fears of a slowdown. Technology stocks were especially sensitive to any signs that their earnings growth might be slowing.
Share markets bounced back later in the month upon stronger US economic data, weaker inflation, and strong hints from the US Federal Reserve (Fed) that it would soon begin reducing interest rates.
Inflation continued to slow across the major developed economies. The US Core Personal Consumption Expenditure (PCE) Price Index, an inflation measure closely watched by the Fed, was unchanged in July at 2.6%. This boosted expectations that US interest rates would be cut in September, which helped push the US dollar down 2.3% relative to the currencies of its major trading partners in August. The US consumer remains resilient, with retail sales strengthening in July.
Economic data in Europe was mixed, with Eurozone activity levels consistent with continued expansion, but showing signs of slowing slightly in July. Meanwhile, the pace of contraction in European retail sales eased to 0.1% year-on-year in July from the previous 0.4%.
Manufacturing activity in China edged back into expansionary territory in July, but consumer spending remains sluggish, while the highly indebted property market remains a drag on economic growth.
The Fund continues to overweight information technology, communications services, and consumer discretionary while underweighting financials, energy, and materials. Strong stock performance in industrials, communications services and healthcare drove relative returns, but this was offset by weaker stock performance and the Fund’s overweight position in technology.
The Fund’s strongest contributor to relative returns was its overweight position in US-based pharmaceutical company Eli Lilly. It outperformed after reporting better than expected second quarter earnings, which were driven by weight loss drugs Mounjaro and Zepbound. It also announced stronger than expected forward guidance and indicated it would expand production faster than anticipated.
US-based multinational technology group Meta Platforms, which owns Facebook also outperformed after reporting better than expected second quarter earnings results and guidance. Meta announced strong demand for digital advertising, helping to grow revenue as it continues to enhance its platform using AI technology.
Italian luxury sports car manufacturer Ferrari performed well after reporting strong second quarter profits and better than expected forward guidance. Ferrari’s recent average sale prices and volumes on new models has exceeded analysts’ expectations, which gives Axiom confidence it will grow earnings sustainably.
The largest detractor from relative returns was the Fund’s overweight position in Japan-based technology company Tokyo Electron, which supplies wafer fabrication equipment (WFE) to semiconductor manufacturers. It underperformed despite reporting better than expected earnings and forward guidance after its key customer Intel announced weaker than expected capital equipment expenditure guidance.
Operational issues at Intel weighed on the entire semiconductor equipment sector. This led to the Fund’s holding in Netherlands-based ASML, which is a key supplier of semiconductor manufacturers, also underperforming the market.
US-based e-commerce and cloud computing giant Amazon underperformed in August after reporting stronger than expected revenue growth in its cloud operation Amazon Web Services (AWS), but weakness in its retail business. Forward operating guidance also fell short of investors’ elevated expectations. Despite weaker consumer sentiment, Amazon’s revised earnings guidance and market expectations for the stock now appear quite conservative.
The Fund reduced its position in French luxury goods house Hermes after Axiom’s analysis of credit card data indicated slowing consumer activity. While Hermes is the most attractive luxury stock, given its exposure to the wealthiest consumers, earnings growth may be below analysts’ expectations this year.
The Fund also reduced its holding in US-based multi-brand cosmetics company e.l.f. Beauty after analysis of tracked scanner data indicated that sales have begun to decelerate over recent weeks. Nonetheless, Axiom remains confident that the company’s non-tracked business (international and direct to consumer) will more than offset the tracked channel’s deceleration in sales.
MSCI upgraded Tokyo Electron’s ESG rating to ‘AAA’ from ‘AA,’ reflecting improved escalation procedures in respect of workplace environment and human resources policies. It has also improved corporate governance, with a majority independent board since August, pay practices that are well aligned with shareholder interests, and appointing a non-executive director with risk management expertise to the board.