Global share markets strengthened

In Emerging Markets, China’s share market surged nearly 11% as the government unveiled a series of measures which are intended to boost domestic consumption. International stocks in the materials sector rallied on the prospect of a recovery in China that will boost activity in its construction industry. Meanwhile, enthusiasm for the prospects of companies with business models  aligned to innovation in artificial intelligence (AI) brought strong outperformances by some stocks in the communication services sector.

Having contributed to relative performance during the first half of the year, the Fund’s quality style detracted from returns in July. The lowest quality quintile of companies in the MSCI ACWI Index (i.e. the bottom 20% of stocks, which the investment manager ranks on quality characteristics such as profitability, balance sheet strength and earnings growth) is a segment in which the Fund is underinvested. However, it outperformed the highest quality quintile by over 4.0% during July. This reflected optimism that the US will avoid a recession following publication of more resilient economic data.

Portfolio Comment

The Portfolio benefitted from strong stock performance in North America, health care and communications services in July. However, this was offset by weak stock performance in industrials and information technology, and an overweight position in health care.

Medical equipment suppliers have performed well this year thanks to the continued recovery in the numbers of surgical procedures, following weaker activity levels during COVID.

Intuitive Surgical is US-based company that develops and manufactures robotic-assisted, minimally invasive surgical systems. It reported that procedures using its flagship da Vinci Surgical System grew 22% in the second quarter compared to the same period last year.

Meanwhile, Edwards Lifesciences, a US company which specialises in the manufacture of heart valves, reported 12% year-on-year organic earnings growth in the second quarter.

Despite their strong performances, neither company met the elevated expectations of the market, and their shares underperformed. This underperformance is expected to be short-term as it does not reflect the fundamental strength of either company. They both provide critical supplies – which are not easily replaceable – for surgical procedures that help resolve severe, often urgent, health issues.

The underperformance of high-quality companies weighed heavily on relative performance in July. Many of the Portfolio ’s most significant detractors from relative returns, such as France-based digital automation and energy management group Schneider Electric, are among its highest-quality holdings.

Sweden-based global information technology company Hexagon, an industrial sensor and digital reality company, underperformed in July. This followed publication of an inflammatory report from short seller Viceroy which accused Hexagon of value-destructive acquisitions and inadequate corporate governance. This underperformance is expected to be temporary as there are strong reasons to disagree with the allegations.

Google-owner Alphabet outperformed during the month when its cloud division reported better-than-expected earnings in the second quarter.

US-based multinational technology group Meta Platforms which owns Facebook, outperformed when it announced improved user engagement and rapid adoption of its newest product – Threads – which aims to challenge X (formerly Twitter).

The spike in oil prices helped US-based oilfields services company Schlumberger to outperform during the month.