Global Equity Strategies: August 2020 Monthly Commentary

September 1st - Delft Partners

Global equity markets were strong in August ending the month up 6.6% in USD terms. The returns in US$ were reduced by strength in the Australian currency which resulted in a c.4% increase for the global equity index in Australian dollar terms.

The USA equity market continues to lead aided by unprecedented fiscal support during Covid-19 and a seemingly tame Federal Reserve. The Jackson Hole speech by Chairman Powell at the end of August, was interesting for what it did NOT state – there was no comment on Yield Curve Control. However, the equity market liked the idea of Average Inflation Targeting which means likely longer periods of ultra-low SHORT TERM rates. Japan was also strong up over 7% in the month.

We remain overweight both regions in the more concentrated Global 30 strategy. With cash flows strong into the Global diversified trust we are carefully evaluating entry prices into the USA where we remain underweight. The spread between Value and Growth returns especially in the USA is approaching remarkable levels. We are experienced and so remember the 1999 ‘party’. We are not sure you have to “keep dancing as the music is still playing”. If you do, make sure you are close to the exits? Liquid assets in other words, are the place to be.

We'll go carefully and invest the cashflows into the anticipated market weakness.

By sector, the leaders were Consumer Cyclicals and Industrials which probably reflects the hope that an economic rebound in Q4 is likely. With an end to job support schemes imminent and unemployment therefore likely to rise, we are not so sure. Any economic improvement is only going to lead to a steeper yield curve anyway which would tend to lead to a reappraisal of equity valuations?

Utilities lagged. We think this an attractive sub asset class – yields are well above those on government bonds; are sustainable; much infrastructure needs re-investment and so curtailing profitability would be a foolish political mistake (not to say that foolish mistakes aren’t made by politicians) and many companies hold assets which are non-regulated which means potentially un capped profits. We prefer this segment to banks while the yield curve remains so flat although we expect this to change. (see above)

After weeks of speculation Japan’s Prime Minister Shinzo Abe announced that he is stepping down for health reasons again, the same medical condition (ulcerative colitis) compelled him to end his first term in office, a one-year stint in 2007. The Liberal Democratic Party have a firm hold on power, so the election of a new party leader and Prime Minister will not alter the domestic political landscape and we retain our positive view of the equity market in Japan.

There was a surprise announcement by Warren Buffett’s Berkshire Hathaway in late August revealing an investment in excess of $6 billion in five of Japan’s trading houses. We expect this to be the first of a series of investments in Japan where there are many companies that meet the Berkshire Hathaway criteria for price to cash-flow and balance sheet strength. This could mark the start of sustained international buying of the equity market in Japan thanks to attractive valuations and the balance sheets.

Itochu (8001) one of the targeted trading companies has been a core holding in the global equity strategies for years. The intellectual capital within these companies as regards materials procurement and supply chain management will become clearly valuable as we see trade frictions, investment embargos, and tariffs become more commonplace.

During August we sold Axa the French insurance company and reinvested the proceeds into Heidelberg Cement in Germany. HEI specializes in the production of cement and building materials globally. Any trip to Europe and the USA would reveal the drastic need for rebuilding of roads, bridges, hospitals, schools, dams...

It is central to our investment thesis that this fiscal boost comes to (thankfully) replace the notion that low interests alone can return us to sustainable and equitable growth.
https://www.infrastructurereportcard.org/

We look forward to the USA election. We continue to look for listed companies which are misunderstood and undervalued by the market. We will continue to hold a diverse exposure to regions and sectors.