We have also included below our recent interview with Ray Vars, Investment Specialist from Harding Loevner.
Market Review
Global share markets rebounded in October as investors digested resilient company earnings reports. The market also contemplated the prospect of less aggressive central bank rate increases as US data showed signs of an economic slowdown. This followed the rapid series of rate hikes this year.
The MSCI World Total Return Index Net Dividends Reinvested Unhedged AUD Index returned 7.8%. Australian dollar weakness modestly boosted share price gains.
Emerging Markets was the only region in which equites declined during the period. This was impacted by weakness in China, where the share market fell almost 17%. This followed the five-yearly Communist Party Congress held in mid-October, where President Xi secured an unprecedented third term. The Party further centralised political and economic control and gave little indication of an early relaxation in the zero-Covid policy that has constrained economic growth.
In Europe, the extremely high price of natural gas eased somewhat when storage levels increased as the weather remained relatively mild. This should help ease medium-term inflationary pressures.
UK equity, fixed income and currency markets rebounded after the appointment of Jeremy Hunt as Chancellor of the Exchequer. This led to the swift reversal of his predecessor’s controversial plans for unfunded tax cuts and spending. His appointment was confirmed when Rishi Sunak took over as Prime Minister at the end of October.
Energy was the strongest performing sector during the month, while Communication Services declined modestly on concerns of weaker advertising spending as the economy slows.
Portfolio Comment
In late September the Portfolio increased its holding in the US technology-focussed banking group SVB Financial Group. The stock had underperformed the market upon concerns that start-up companies, which represent a sizable portion of SVB’s customer base, would fare poorly in the face of interest rate increases and a possible recession.
While the weakness in the company share price had left it attractively valued, the stock continued to underperform in October when the company released weaker earnings guidance. This highlighted the impossibility of identifying the low point of a stock cycle other than with hindsight.
However, the decision to increase the Portfolio’s exposure to the company reflects its focus on identifying high-quality, businesses that demonstrate the ability to grow sustainably over the long-term. The Portfolio seeks to invest in such opportunities when market valuation levels fail to reflect their strong business fundamentals, providing attractive investment opportunities.
US banking and wealth management group First Republic Bank underperformed the market after it announced disappointing net interest income margin guidance.
US-based social media technology group Meta Platforms significantly underperformed the market after the company reported weaker earnings. This was due to continued high levels of investment in Horizon Worlds, its social virtual reality business and Quest, its virtual reality headset unit. This supports its strategy of pivoting the business towards establishing a market leadership position in the metaverse.
US-based manufacturer of agricultural machinery John Deere and US industrial automation group Rockwell Automation both outperformed the market during October. The two industrial companies continue to benefit from the trend of shortening supply chains to increase manufacturing resilience, and industrial automation, which are gathering pace in the US.
Portfolio Manager
Portfolio Manager
Pengana International Equities Limited (trading on the ASX as PIA) is the largest international ethical Listed Investment Company (“LIC”) on the ASX. PIA’s objective is to provide shareholders with capital growth as well as regular, reliable, and fully franked dividends.
The strategy aims to generate superior risk-adjusted returns, through investing in an actively managed portfolio of global companies that meet the investment team’s high-quality and durable growth criteria at reasonable prices. A robust ethical framework provides an added layer of risk mitigation.
These companies are identified through the conduct of fundamental research, with a long-term, global perspective, and must exhibit the following four key investment criteria: competitive advantages, quality management, financial strength, and sustainable growth potential.
1. As at the last day of last month prior to publishing of this report. Performance figures refer to the movement in net assets per share, reversing out the impact of option exercises and payments of dividends, before tax paid or accrued on realised and unrealised gains. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception date of PIA: 19 March 2004, new investment team with new mandate adopted: 1 July 2017. Pengana International Equities Limited has been managed under the new investment mandate by the Pengana investment team since 1 July 2017. The performance since mandated in the table above refers to the movement in net assets per share since the new mandate adopted on 1 July 2017.
3. Annualised Standard Deviation since mandated
4. Relative to MSCI World
**As at the last day of last month prior to publishing of this report. The figures are unaudited.
*** Index/MSCI World refers to the MSCI World Total Return Index, Net Dividends Reinvested, in A$.
