December report

• Global share markets fell in December upon central bank comments which suggested global interest rates have further to rise and will remain elevated throughout 2023
• Chinese stocks continued to rebound as the zero-Covid policy was abruptly unwound, raising hopes this will support the global economic recovery
• The Portfolio returned -5.6% in December, while the benchmark returned -5.4%

Top Holdings (alphabetically)

Alphabet Inc

United States

Communication Services

Alphabet Inc. operates as a holding company. The Company, through its subsidiaries, provides web-based search, advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce, and hardware products.

AMETEK Inc

United States

Industrials

AMETEK, Inc. is a global manufacturer of electronic instruments and electromechanical devices. The Company manufactures advanced instruments for process, aerospace, power, and industrial markets and is a supplier of electrical interconnects, specialty metals, technical motors and systems, and floor care and specialty motors.

Deere & Co

United States

Industrials

Deere & Company manufactures and distributes a range of agricultural, construction, forestry, and commercial and consumer equipment. The Company supplies replacement parts for its own products and for those of other manufacturers. Deere also provides product and parts financing services. Deere and Company extends its services and products worldwide.

First Republic Bank

United States

Financials

First Republic Bank and its subsidiaries provide private banking, private business banking and private wealth management in urban, coastal markets in the U.S. First Republic delivers relationship-based service by providing a single point of contact for all of its services.

HDFC Bank Ltd

India

Financials

HDFC Bank Ltd. offers a wide range of services to the global corporate sector. The Bank provides corporate banking and custodial services and is active in the treasury and capital markets. HDFC also markets project advisory services and capital market products such as Global Deposit Receipts, Euro currency loans, and Euro currency bonds.

Microsoft

United States

Information Technology

Microsoft Corporation develops, manufactures, licenses, sells, and supports software products. The Company offers operating system software, server application software, business and consumer applications software, software development tools, and Internet and intranet software. Microsoft also develops video game consoles and digital music entertainment devices.

Schneider Electric SE

France

Industrials

Schneider Electric SE manufactures electrical power products. The Company offers car chargers, home security goods, light switches, access control, sensors, valves, circuit breakers, cables, accessories, signaling devices, fuse, motor starters, and voltage transformers. Schneider Electric serves customers worldwide.

Synopsys Inc

United States

Information Technology

Synopsys, Inc. supplies electronic design automation solutions to the global electronics market. The Company provides design technologies to creators of advanced integrated circuits, electronic systems, and systems on a chip. Synopsys also provides consulting services and support to its customers to streamline the overall design process and accelerate time to market.

UnitedHealth Group Inc

United States

Health Care

UnitedHealth Group Incorporated owns and manages organized health systems. The Company provides employers products and resources to plan and administer employee benefit programs. UnitedHealth serves customers in the United States.

Vertex Pharmaceuticals Inc

United States

Health Care

Vertex Pharmaceuticals Incorporated discovers, develops, and commercializes pharmaceutical products. The Company develops drugs for the treatment of cystic fibrosis, cancer, inflammatory bowel, autoimmune disease, and neurological disorders. Vertex Pharmaceuticals serves healthcare sector worldwide.

Market Review 

The MSCI World Total Return Index, Net Dividend Reinvested, AUD returned -5.4% in December.

Investor sentiment weakened when the US Federal Reserve (Fed) increased interest rates by 0.50% to a new target range of 4.25% – 4.50%. While this was expected, the Fed also indicated that it now expects rates to reach a peak above 5.0%. This reflects the strong US labour market, with unemployment at a historic low level of just 3.7% putting upward pressure on wages. The Fed continued to suggest interest rates would remain high throughout 2023, not starting to fall back until next year.

The European Central Bank and the Bank of England also increased interest rates by 0.50% in December. The Bank of Japan signalled a potential end to its ultra-accommodative monetary policy, which sent the yen soaring.

Shares in China and Hong Kong enjoyed a relief rally after the government rolled back the country’s zero-COVID policy, following unusual but widespread protests. This is expected to support global growth in the medium-term, despite rising infection numbers.

Portfolio Comment

During December, global value stocks outperformed growth by 3.2% in Australian dollar terms, as global central bank monetary policy remained restrictive. All market sectors except energy posted negative returns in December.

The Portfolio benefitted from positive stock selection in financials, overweight positions in healthcare and industrials, and the underweight position in consumer discretionary. However, negative stock selection in healthcare and consumer staples, the overweight position in information technology, and the underweight position in consumer staples detracted from relative returns.

The Portfolio recently established a position in the high-quality, durable growth consumer staples company Costco Wholesale, which is a US retail warehouse operator. Its business model benefits from membership fees and bulk sales, offering members low prices on a limited selection of both brand name and store-labelled products.

This model has proven to be resilient, offering the lowest unit prices in the US retail market, which has brought strong customer loyalty and low operating costs. The company is already a well-run business with strong profitability, but its future growth will be helped by its expansion into international markets such as Mexico and China.

US biopharmaceutical company Vertex Pharmaceuticals underperformed the market in December, when investors realised gains following strong year-to-date performance.

US-based fixed income trading platform Tradeweb, which is in the financials sector, contributed to relative returns when the company announced a partnership with BlackRock to enhance electronic bond trading.

Weak stock selection in the Eurozone detracted from relative performance in December. This included the French luxury goods conglomerate Kering, which faced slowing sales momentum in China, and whose Balenciaga brand was marred by controversies.