Global Equity Strategies: November 2020 Monthly Commentary

December 17th 2020 - Delft Partners

Global equity markets ended the month up by over 10.0% in USD terms and increased by over 5% in AUD terms. Value outperformed Growth quite significantly and small outperformed large. The US$ was a weak currency against most of the majors.

Our global equity strategies rose in line with the market capitalisation indices.

The past month has seen a 37% increase in the official number of Covid-19 cases globally, a small acceleration from the 35% growth rate recorded in the month of October. We are beginning to learn to live with this and a vaccine is soon to be administered albeit on a limited basis.

The USA election remains officially undecided, since President Trump hasn’t conceded, and the electoral college votes have yet to be cast, although the Democrats are starting to nominate for key positions in the Administration. We expect little foreign policy difference between this new Administration and President Tump’s. Domestic policy is also likely to focus on job creation with Janey Yellen nominated as Treasury Secretary. His was one of the previous Administration’s successes and is sorely needed. ‘Build Back Better’ may not be so different from “Make America Great Again”? In other words, we will have style but not substance change with which to deal.

We anticipate the continuation of a National Industrial Policy for the USA and China with a gradual rebuilding of domestic capital stock very necessary in the USA. This will be positive for Infrastructure related companies.

Asia including Japan remains our key regional focus for Global Equities. Geopolitically the region is becoming more important and countries are beginning to develop better relationships with perhaps only one exception? Taiwan and China?

The Chinese foreign minister Wang Yi met Prime Minister Suga at the end of his two-day trip to Japan, a trip that marked the first high level visit since Mr Suga was elected party leader and Prime Minister in September. Prime Minister Suga stressed the need for a “stable relationship” between Japan and China. Some progress was made with the proposed resumption in business travel in December, together with positive comments regarding cooperation with respect to trade and fighting Covid-19. The long running territorial dispute regarding islands in the East China Sea will remain the subject of future talks. The prospect for a three-way trade deal including South Korea is being pursued by foreign minister Wang as he continues his travel around the region. If this trade deal can be secured, it would mark significant progress from the friction that has remained in place between Japan and South Korea for the past eighteen months and would be taken very positively by markets.

Asia economies also continue to improve. China reported that the factory sector accelerated at the fastest pace in a decade with business survey data in November. Japan’s industrial output increased for the fifth straight month rising by 3.8% in October with a recovery in the numbers for motor vehicles being most notable after an extended period of weakness. There was also encouraging news regarding retail sales which increased 6.4% in the year to October, the first time an increase has been recorded since February 2020. Prime Minister Suga has instructed his cabinet to compile a package of stimulus measures to reinforce the recovery that appears to be underway. The unemployment rate in Japan remains at 3.1% and the jobs to applicant’s ratio increased for the first time since April 2019.

Invest in Japan – the market is cheap and there are clear signs of a better outcome or shareholders relative to management and employees. In other words, dividend increases, M&A and better capital allocation decisions which will increase return on capital.

Notable positive stock movements in the month came from Shin-Etsu Chemical, rising over 20%, Valero the USA refining company, rising almost 50%, Barratt Developments + 20%, Manulife Financial +30% and Orix in Japan + 25&. Chinese companies fell as the USA has proposed making it illegal for certain of them to raise capital from USA citizens. CNOOC and Baba both fell with the latter also hurt by the postponement or cancellation of its listing of Ant Financial. China runs a current account surplus, has substantial foreign exchange reserves, its own currency, and reasonably high savings rates. Funding for capital expenditures from domestic sources is therefore easy. The price falls are only news and sentiment related. USA investors will be replaced by others if they are forced to sell.

The portfolio remains fully invested and there were no new positions acquired or disposals made during the month of November. We will continue to invest in attractively valued companies with strong value, momentum and quality attributes together with accounting, strategy and governance standards that meet our requirements. Japanese, Infrastructure or capital stock renewal companies, and USA domestically oriented companies are the most attractive. Long-term returns will be generated by the ability of our companies to deliver growing profits and dividends.