September Report

Equity market volatility continued in September upon initial fears that the global economy was slowing faster than had been previously expected. Share prices rebounded later in the month after the US began to reduce interest rates, with further monetary easing in the Eurozone, Canada, Switzerland and Sweden.  Global equities ended the month higher in local currency terms but a weaker US dollar detracted from returns in Australian dollar terms.

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 Federal Reserve (Fed), accelerated slightly in August, although the headline measure fell. This is not expected to prevent the Fed reducing interest rates further in November and December. This helped push the US dollar down 0.9% relative to a basket of its major trading partners’ currencies in September. The US consumer remains resilient, with retail sales accelerating further in August.

Economic data in Europe was mixed, with Eurozone activity levels indicating that the economy was again contracting. However, European retail sales continued to accelerate, increasing 0.8% year-on-year in July.

Manufacturing activity levels in China signalled a return to contraction in August, as broader economic data in the country continued to disappoint investors. Consumer spending is sluggish, while the highly indebted property market remains a drag on economic growth.

The Fund continues to overweight information technology, consumer discretionary and communication services, while underweighting financials, materials and energy. Strong stock performance in industrials, the overweight position in consumer discretionary and the zero weighting to energy drove relative returns. However, this was offset by weaker stock performance in consumer discretionary and information technology.

The Fund’s strongest contributor to relative returns in September was its overweight position in the US-based provider of critical infrastructure for data centres and communication networks, Vertiv. It rebounded upon the announcements of data centre capacity expansion.

US-based multinational technology group Meta Platforms also contributed to relative returns during September, when intra-quarter advertising spending continued to track ahead of earlier expectations.

Japan-based multinational Hitachi, which has large digital systems, power and renewable energy businesses, also outperformed. This reflected accelerating electricity consumption by AI-driven data centres and increasing investment in electricity grids globally.

The Fund’s overweight positions in Denmark-based Novo Nordisk and US-based Eli Lilly detracted from relative returns. The pharmaceutical giants underperformed after weekly pharmacy script data for GLP-1 weight-loss drugs slowed in September.

Netherlands-based ASML, which supplies manufacturers of advanced semiconductors with extreme ultraviolet lithography (EUV) photolithography machines, also detracted from relative returns. This followed chip makers Intel and Samsung Electronics, both large spenders on the wafer fab equipment used in semiconductor manufacturing, reducing their capital expenditure.

The Fund trimmed its positions in the stock and also reduced its holding in Japan-based technology company Tokyo Electron due to falling capital investment in wafer fab equipment. Weak demand in global smartphone and PC markets are expected to further curtail their customers’ 2025 capital expenditure.

The Fund increased its position in Hitachi, as analysis of global power demand from the buildout of AI infrastructure indicated that Hitachi’s market opportunity is underestimated. The company’s power grid business is well positioned to exceed current consensus earnings expectations, justifying a higher exposure to the stock in the Portfolio.

US-based Equinix is a global data centre and interconnection services provider that offers space, power, connectivity, security and support to its customers. We expect data centre demand to remain robust as it continues to benefit from ongoing AI innovation.

US-based TJX Companies is the largest global off-price retailer, whose brands include TK Maxx in Australia. We believe that it can benefit from secular growth as it expands in the US and internationally by increasing market share and growing volumes. TJX should benefit from ongoing retail disruption as consumers pivot to value outlets and higher borrowing costs impact more indebted retailers.

The Fund exited its remaining position in e.l.f. Beauty, as tracked channel data continued to indicate demand growth was falling below market expectations.

The position in Dutch technology group STMicroelectronics was fully exited, as the Fund selectively reduced its semiconductor exposure. Furthermore, its auto exposure appears less attractive following profit-warnings across the industry.

MSCI upgraded the ESG rating of Mexican multinational beverage and retail company Femsa to ‘AA’ from ‘A’. This reflects changes in the company’s leadership, which addresses concerns regarding the influence of controlling shareholders.

MSCI also upgraded Japan-based industrial group Keyence to ‘A’ from ‘BBB’ following improvements in its corporate governance practices which are now in-line with those of its global peers. A remuneration and nominations committee was established in September, which is expected to bolster the oversight of executive pay practices and board succession planning.