Global Equity Strategies: July 2021 Monthly Commentary

The Global Equity strategies performed creditably in July with the GHC 30 (value biased 30 stock portfolio drawn from the more diversified Global Trust) up over 2% in A$ and the Global Trust up more than 2.5%

The 10 year note in the US declined in yield, rose in price, and investors generally rotated back to ‘growth’ stocks. In Asia, a Covid resurgence and more anti-liberal legislation from the Chinese Communist Party impacted Asian equities in general. Asia declined over 8% as a consequence. For more detailed comments on the situation in China see our Asian Small Cap commentary here

In the USA an Executive Order signalled that the Surface Transportation Board (STB) would be intervening in the Railroad and Shipping industries to prevent and reduce monopolistic power. This affected Norfolk Southern (NSC), Union Pacific (UNP) and to a lesser extent UPS, and FedEx. NSC and UNP both had solid profit results and NSC increased their dividend by 10%, usually a sign of management confidence and a trigger for continued outperformance. The STB was the agency that allowed the existing US structure in the 1990s, and our guess is that this is a general pronouncement to specifically target a Canadian company’s bid for a US Railroad’s assets – Canadian National and Kansas City Southern – and not the start of a dismantling of the industry structure in general. However, this follows the formulation of 5 separate bills in Congress specifically targeting ‘Big Tech’. It looks as if a 3rd policy tool is being developed and this one is to try to alleviate some of the inflation pressure and pricing power caused by the first two.

We therefore seem to have a 3-pronged policy from this administration: easy money; loose fiscal; and anti-monopoly legislation aimed at large companies to ‘increase price competition’. Re-regulation as a risk is not confined to the Chinese market.

On the positive side the first part of the infrastructure package seems to have passed both Houses. We have been repetitive about infrastructure spending as both necessary and having a strong multiplier effect so are well invested in these beneficiaries.

We benefitted from significantly positive in KLA and Kroger in the USA and ZOZO a new purchase, (on the last day of the month), and Hoya in Japan.

We sold Ebara and Hitachi in Japan reinvesting in ZOZO (an internet commerce stock that was sold off as investors thematically liquidated e commerce stocks globally in the face of the Chinese crack down) and Home Depot in the USA. While house prices need to stabilise the recent frenzy in purchases and sales will typically lead to a renovation frenzy in the next few months. Home Depot provides the tools and raw materials for home renovation.

As for inflation, we say ‘yes, it is here; it never went away if measured properly; is going to be more apparent and harder to conceal, and investors should hedge themselves. The new rhetoric from the central bank geniuses that brought you three crashes and unsustainable debt in the last 20 years, is that inflation is “good for you”’.

Sentiment is shifting slowly but materially and palpably back to stocks perceived as cheaper, safer both financially and from legislation, and with a degree of protection from inflation. This includes infrastructure companies, also REITs, and raw material companies.

Our investment philosophy is to allocate risk carefully, where risk is measured as potential expected deviation from the client assigned benchmark. Our active risk against the benchmarks is about 4% which means we can expect to perform within + / - 4% of the benchmark most of the time on an annual basis. Currently we are adding significant positive return to the benchmarks, so the risk we take is proving successful.

Much of that risk is stock specific and the factor risk comes from overweights to smaller companies, value style, and Industrials with an underweight to US large caps / ‘Technology’.

Delft Partners July 2021