Global Equity Strategies: December 2021 Monthly Commentary

World markets rose c. 4% in US$ and c. 2% A$ during December, as investors judged that flagged interest rate increases would be insufficient to slow profits growth. Both our global equity strategies outperformed their respective benchmarks.

Equities are the best inflation hedge as long as inflation remains 'under control' and increased regulation is ineffective. For the moment both appear to be the case even though both are increasing. The USA, Europe and China all introduced or signalled more regulation, although China is likely to ease policy as the other regions tighten, albeit to a miniscule degree.

We remain invested in companies benefitting from increased industrial activity, productivity enhancing investment (true technology, infrastructure), useful companies that make life better, and those with a margin of balance sheet safety.

We like Japan. Shareholder activism is on the rise in Japan which will help continue the trend toward better treatment of shareholders. Negative news flow from the continued Covid induced lock downs is the headwind to a higher market rating. These will cease and the market is likely to return to the uptrend.

Notable positive contributors came from Japan despite a lacklustre market overall. Sony and Canon, a recent purchase, rose over 10%. Our focus on 'true technology' paid off in the USA where Seagate rose over 30%, KLA over 25% and Johnson Controls over 15%. Kroger the food retailer flagged price increases for most products and the shares rose over 10% in the quarter. See comment above on inflation and equities! Alibaba remains a conundrum although we are tempted to follow Charlie Munger in buying more.

Chinese interest rate cuts and various other liquidity injections are likely to assuage the impact of the Evergrande failure which rumbles on. Other Chinese property companies will follow. We believe this can be managed but followers of GDP will be disappointed. For comments on China's pivot to 'common prosperity' please click here.

For those expecting continued aggressive posturing between the US and China, we note the deal being negotiated between CNOOC, the oil company, and Cheniere Energy, the US LNG provider, wherein Cheniere provides LNG to China to alleviate the rise in energy prices. We own both companies in the diversified strategy. Our belief remains that 'useful' companies will remain untouched by draconian legislation in China. Perhaps not so in Europe where Iberdrola and now EDF (which we do not own) have been hit by governments interfering with their terms of operation to keep a lid on the energy prices whose inflation has been caused by the very same government.

We added a little to China Construction Bank late in the quarter for the GHC 30. It is now a top 10 holding, and also owned in the diversified trust.

We massively prefer dividend paying stocks, and don't 'market time'.

Profit taking from bubble stocks has already started in the USA. More than 200 US listed companies above $10bn in market cap are down at least 20% from their highs. Almost 40% of NASDAQ stocks have fallen by at least 50% from their highs. In asset allocation terms we prefer US Value and Chinese Growth given the relative earnings multiples within and between the respective countries.

The US yield curve continues to steepen and rise. German government issued bunds turned positive again. Monetary conditions are being tightened regardless of what central banks want, and they are behind the curve. Loss making companies such as Peloton and other favourites are consequently dangerous for investors. We have made many comments on this.

Our global equity strategies are anticipating and positioned for a rational switch away from the bubble stocks back towards something approaching a normal market wherein dividends and profits and reinvestment in the business are favoured.

The risk to this thesis lies in the mass redemption of momentum funds which have lost their lustre and whose investment process and risk controls have been revealed as non-existent. Once these funds have to mass liquidate their underlying investments, the exit doors get very small very fast, and then the hedging of positions via selling of the larger liquid stocks begins, which in turn creates a selling momentum. Some Wall Street banks have already begun dumping equities from their prop books. The usual suspects are obvious to all.

Our advice for the next few months or even years, is be happy with 8% pa and don't stretch out along the risk curve for 15%. Also remember that in 2001 post the Tech sector and real estate bubble popping, the Value segment of the market was ultimately a reasonable place in which to be invested.

We like listed global infrastructure companies for their exposure to the forthcoming fiscal programme to repair and provide essential facilities to grow economies, and for their stability of revenue and profits. With an average Beta of 0.8 to the global equity market they represent a lower risk way to generate income and provide some inflation protection. Cash will remain a place in which to lose purchasing power in the long run.

As always don't hesitate to get in touch with questions comments and suggestions.

Delft Partners, January 2022