October Report

Global equity markets moved lower in local currency terms during October, unwinding a little of the huge gains delivered so far this year. Share prices were impacted by rising bond yields, reflecting investor fears that fiscal expansion following the US presidential election might increase inflation and bring higher interest rates. Ongoing weakness in China’s economy further detracted from market sentiment.

Inflation continued to slow across major developed economies. The US Core Personal Consumption Expenditure (PCE) Price Index, an inflation measure closely watched by the Federal Reserve (Fed), was unchanged in September at 2.7% year-on-year, while the headline rate fell to 2.1%.

The US dollar rose 3.2% against a basket of major US trading partners’ currencies in October. This reflected concerns that a Trump victory in the November US presidential election could eventually bring higher inflation, which would require higher interest rates. The US consumer remains resilient, with retail sales growing, but at a slower pace than in August.

In Europe, retail sales were relatively stable, growing 0.5% over the year to September, down slightly from 0.8% in the prior month. However, negative sentiment was reflected in purchasing managers’ index data, which was consistent with the economy moving back into contraction.

China’s Caixin manufacturing PMI data indicated a return to expansion in September, although the country’s broader economic data continued to largely disappoint expectations. China’s highly indebted real estate market continues to constrain consumer spending, which remains sluggish.

The Fund continues to overweight information technology, consumer discretionary, and communication services while underweighting financials, energy and consumer staples. Strong stock performance in information technology, financials, and industrials drove relative returns in October. However, this was somewhat offset by the underweight to financials and weaker stock selection in health care.

The Fund’s largest contributor to relative returns in October was its overweight position in US-based semiconductor developer Nvidia. It outperformed upon expectations that strong investment in data centre capacity by the hyperscalers will support continued demand growth for advanced chips.

Taiwan-based semiconductor manufacturer TSMC also outperformed after reporting better than expected September quarter earnings, with particularly strong gross margins. Strong demand for Apple iPhones and broader AI-related innovation are driving orders for advanced 3nm and 5nm semi-conductors.

US-based international streaming and production company Netflix outperformed in October upon strong September quarter earnings results. It reported better than expected new international subscriber and Average Revenue Per User (ARPU) totals and that its new advertising-supported product tier was performing ahead of forecasts.

Europe’s largest technology company, the Netherlands-based supplier of advanced semiconductors ASML, underperformed upon manufacturing issues at Intel and Samsung, two of its largest customers. While the long-term outlook remains strong, near-term demand may be impacted

US-based science and technology group Danaher underperformed after announcing disappointing forward earnings guidance, despite reporting stronger than expected third quarter profits. We remain confident that it is simply taking a cautious approach as growth eases in its diagnostic and bioprocessing businesses.

US-based real estate investment trust Prologis, which invests in logistics facilities, underperformed in October. Property companies are sensitive to longer-term bond yields, which increased in October upon fears that steeper long-term inflation could eventually lead to higher interest rates, despite the Fed’s October rate cut.

The Fund established a position in Germany-based software-as-a-service group SAP. It is the world’s largest enterprise applications software company, with over 350,000 customers in 188 countries. We expect it to benefit when large-scale M&A deals resume and believe the economy is still in the early stages of the growth in cloud computing.

The investment team engaged with Novartis on a range of ESG issues during October. The company explained the company’s robust employee benchmarking and better baseline targets, it also outlined how ESG metrics have been part of executive compensation since 2018. The company has launched a new internal platform called Match that connects employees for mentorship, projects, and skills development across geographies using AI. Key issues which will continue to be monitored include introducing ESG metrics into executives’ long-term incentive plans, developing a dashboard for supplier emissions and minimising the use of carbon credits to achieve emissions reduction targets.