March Report

Market Review

Global equity markets declined in March as a regional conflict in the Middle East introduced significant uncertainty for investors. US and Israeli airstrikes on Iran at the end of February escalated into a broader confrontation that closed the Strait of Hormuz, one of the world’s most important oil transit routes, and drove a sharp rise in energy prices.

The surge in oil prices benefited energy companies, which were the only part of the market to post positive performance during the month. Elsewhere, the rise in energy costs weighed broadly on earnings expectations. Industries with high input costs were particularly affected, while consumer-facing businesses contended with the prospect of weaker demand as higher energy prices flowed through to household budgets. The breadth of the decline reflected growing concern that a prolonged disruption to energy supply could weigh on global economic activity.

Regional performance varied. US equities held up better than most, supported by the more defensive nature of some of its larger companies. Emerging Markets was the weakest region, led lower by Taiwan and South Korea, where companies involved in semiconductor manufacturing fell as the conflict raised concerns about disruptions to the supply of key materials used in chip production.

Portfolio Commentary

March presented a challenging backdrop for the portfolio. The conflict in the Middle East raises important questions about which companies are best positioned to navigate a range of economic outcomes. Rising energy costs, weaker consumer demand, and tighter financial conditions would not affect all businesses equally.

The investment approach focuses on identifying companies with strong balance sheets and durable competitive positions. Businesses that fund their operations through internally generated cash flow, rather than relying on external financing, tend to be better placed in uncertain environments. Over time, these types of companies have historically gained ground on weaker competitors during periods of disruption, while conservative levels of debt help preserve flexibility to pursue growth opportunities.

When markets face sudden change, there can be an expectation that the portfolio should change with it. However, the investment approach is designed to position the portfolio for long-term structural trends, whether that be the world’s evolving infrastructure needs or the type of economic disruption that might follow a prolonged energy shock, rather than reacting to short-term events.

During the month, the portfolio initiated a position in nVent Electric, a US-based company specialising in electrical connection and enclosure products for data centres, utilities, and industrial applications. The company generates strong cash flow and is well positioned to benefit from the growing demand for electrical infrastructure.

Among individual holdings, Samsung Electronics, the South Korean semiconductor manufacturer, was the largest detractor as concerns grew that the conflict could disrupt semiconductor supply chains. Chugai Pharmaceutical, the Japanese biotechnology company, also declined after its parent company, Roche, halted development of a drug candidate. On the positive side, Diploma, the UK-based distributor of specialised technical products, rose after raising its guidance on the back of strong demand in its aerospace business. The strong performance of energy and defence companies during the month also worked against the portfolio’s ethical screens, which exclude companies with material involvement in fossil fuels, weapons, and nuclear energy.

While periods of market disruption can be uncomfortable, they often reinforce the value of owning well-capitalised businesses with strong competitive positions and the ability to continue generating cash flow through a range of economic conditions.