Global Equity Strategies: September 2020 Monthly Commentary

October 3rd 2020 - Delft Partners

The past month has seen a 33% increase in the official number of Covid-19 cases globally, a deceleration from the 47% growth rate recorded in the month of August. US and European stocks consequently declined as lock downs were selectively re-introduced, but Asia was more resilient. Global indices declined about 3.5% in USD terms with Asia flat; Japan rose. In a reversal of the recent trend, Australian based investors were able to benefit from a weaker Australian dollar. In the year to date the markets have largely recovered the Covid-19 losses from the first quarter to stand at +3% in USD terms.

It was a big ex-dividend month for Japan with approximately half of all companies in that market adjusting for dividend payments on the 29th of the month. Companies in Japan have a habit of selling off in the immediate period after the ex-dividend date by more than the dividend amounts and this time was no exception with the market ending well below the highs recorded before the ex-dividend adjustments.

September was another month of trade tension between the United States and China especially in the field of semiconductors with suppliers of equipment to China’s Semiconductor Manufacturing International Corporation being threatened with requirements to apply for individual export licences. This had consequences for the SME companies and the Taiwanese companies rose, as did the Japanese but US companies such as KLA Corp and Ciena fell as order books may well be impacted. This tension and recasting of the supply chain will continue regardless of which side wins the US election.

The key political change during September was the election of Japanese Chief Cabinet Secretary Yoshihide Suga as party leader and Prime Minister of Japan. Mr Suga, 71, spent nearly eight years as Chief Cabinet Secretary in the Shinzo Abe administration and is seen as likely to continue the same policies as Mr Abe. In particular we will be watching for a continuation of the policies allowing a greater flow of immigration in order to address Japan’s serious demographic problems. Covid-19 has completely stopped the movement of people into Japan during 2020 and we will be looking to the new Prime Minister to enact measures to accelerate immigration during 2021 and beyond.

NTT announced the proposed acquisition of the minorities in NTT DoCoMo at a 30% premium to the prevailing share price. This was of benefit to the global strategy performance. This is the 3rd such deal in Japan in the last 18 months following the Hitachi bid for Hitachi High Tech’s minorities, and Sony for Sony Financials’. We remain of the view that Japanese shares are cheap relative to potential earnings power which is more likely to be realised now that corporate restructuring is happening.

We made adjustment to the portfolio in September selling out of Veolia in France and reinvesting in Shin-Etsu Chemical in Japan and Quest Diagnostics in the USA, The former is a long term beneficiary of increased expenditure on wafer production and the latter of higher levels of testing for viruses probably in perpetuity.

We repeat what we have stated for a little while now. Obtaining equity returns of 8% p.a. may seem low but are attractive relative to cash rates and government bond yields which are being suppressed and held at zero in nominal terms and negative in real terms. At some point the yield curve will steepen which will affect the kinds of equities to own. In order to obtain even 8% p.a., it helps to start with a decent dividend yield and the prospect of P/E expansion from good business management driving the bottom line. In other words, ‘Value’ stocks with good governance.

This is exactly the philosophy of our global equity strategies.