August Report

Market Review 

Global stock markets rallied following a sharp sell-off in early August, closing the month higher in local currency terms. Equity markets initially fell steeply after the Bank of Japan’s surprise 0.15% increase in its interest rate at the end of July gave rise to a scramble to unwind carry trades. These involve investors borrowing in currencies with low interest rates (e.g. yen) to invest in securities with higher return prospects (e.g. US Treasuries or tech shares). The unwinding of these trades brought an appreciation in the value of the yen, which sparked a 12% plunge of Japan’s Nikkei index on 5 August.

Share market falls accelerated after weaker US labour market data suggested a faster slowdown in the US economy than markets had been expecting. Negative sentiment reverberated across global markets and measures of volatility spiked to levels not seen since the early days of COVID-19.

However, after falling 6% in the first three trading days of August, the MSCI ACWI Index finished August 2.6% higher, after lower inflation brought growing expectations of lower interest rates. European shares rose 3.9%, and even Japan’s market delivered a modest 0.5% gain.

Health care was the strongest performing sector, returning 5.5% in August, while information technology, energy and materials underperformed. Semiconductor stocks stumbled in late August after NVIDIA’s forward earnings guidance fell short of some investors elevated expectations, despite better-than-expected June quarter earnings. This heightened concerns that the returns on AI investments might be more gradual than had been anticipated.

Portfolio Commentary

The Portfolio is focussed on identifying great companies through bottom-up analysis and continues to find exciting opportunities in health care, communications services and industrials, in which it maintains overweight positions.

Strong stock performance in financials and communications services and an overweight position in healthcare was offset by weaker stock performance in healthcare and industrials.

The Portfolio’s exposure to financial stocks is focussed on securities and derivatives exchanges such as CME Group in the US and B3 in Brazil, rather than banking groups which account for much of the sector. Unlike many financial companies, exchanges do not carry credit risk; they also enjoy high operational leverage and robust cash generation. Exchanges often benefit from market volatility as trading volumes increase upon selling pressure, which drove CME Group’s outperformance in August.

Both CME and B3 have created high barriers to entry by vertically integrating their own clearing houses and by operating across multiple asset classes to offer greater capital efficiency for clients. This structure creates a more diverse and stable revenue base compared to exchanges dependent on a single asset class. Additionally, CME and B3 benefit from a strong network effect, where their market-leading liquidity attracts more liquidity, reinforcing their competitive advantage and boosting profits.

US-based multinational technology group Meta Platforms, which owns Facebook, Instagram and WhatsApp outperformed in August. This reflected continued investor enthusiasm for the company’s investments in AI tools designed to enhance the value of its platform to digital advertisers.

US-based biologic drug company Repligen underperformed following reports it intended to acquire Maravai Life Science (a developer of technology used in manufacturing COVID-19 vaccines) upon fears the takeover could dilute existing Repligen shareholders.

Atkore is a leading US-based global manufacturer of pipes, tubing, electrical cables and security-fencing products. It underperformed upon weaker-than-expected volumes for its PVC conduits and increased competition from steel conduits imported from Mexico.

The Portfolio has exited its position in UK-based Spirax-Sarco, a market leader in steam management systems and fluid path technologies. Shares have become highly priced, and a significant portion of the company’s future earnings are expected to come from its Watson-Marlow business, which primarily serves the biopharmaceutical industry. While biopharmaceutical capital spending has been recovering, the portfolio already holds several strong companies which are focussed on drug-development, but which enjoy more attractive valuation levels.

The Portfolio has established a new position in Alfa Laval, a Swedish manufacturer of specialty heat-transfer, centrifugal-separation and fluid-handling products. It is a market leader in providing products addressing three environmental issues faced by shipping companies: ballast water, exhaust emissions and waste fuel oil recovery. The company has a long history of generating attractive profit margins. Moreover, Harding Loevner believes that regulations designed to reduce the environmental impact of shipping will increase the long-term demand for Alfa Laval’s products.