Global High Conviction Strategy: October Commentary

Global equities overcame geopolitical hurdles in October, with gains of 2.8%, in US$ as measured by the S&P Global BMI. All major global regions were up, along with 43 of 50 countries represented in the index. The Asian region was the stand-out performer. The index increased by 4.8% in USD terms and 2.7% in AUD terms.

October

The Australian dollar reversed the recent trend by gaining against the US dollar.

The global strategy rose by over 4% in US$ terms in October which is a significant outperformance. Our objective remains to outperform our benchmark by about 2-3% pa over the medium term, so 1% in a month is unusually strong.

The key positive development during October was a signal from the United States that they are prepared to sign a "Phase One" trade agreement with China. The "Phase One" trade agreement covers 60% of the disputed items and largely represent the "easy" elements of a broader agreement. A signing ceremony was scheduled for mid-November in Santiago at the Asia-Pacific Economic Summit but street protests about fare increases caused a postponement. A new venue for signing the "Phase One" trade agreement is being negotiated. This element of the trade deal represents a major win for China since their negotiating position has consistently attempted to delay the problematic elements of a broader trade deal that was being pursued by the United States.

These street protests in Chile are about more than fare increases. Similar protests in Beirut over proposals to tax internet phone calls; riots in Hong Kong; and Extinction Rebellion marches in London and Gilets Jaunes riots in Paris all have root causes in perceived inequality; unaffordable housing; and poor job security. These have all been exacerbated by a decade or more of "monetary policy for rich people" aka Zero Interest Rates Policy or ZIRP. We will write some thoughts about this following our recent trips to the UK, Europe and Hong Kong.

The USA market rose bolstered by strong corporate earnings, although revenues came in light, and another rate cut from the U.S. Federal Reserve. Value outperformed Growth.

There was an extension granted to Brexit despite Boris Johnson saying he "would rather die in a ditch than go back to Brussels" to make that request. Our conclusion after a visit to the UK and Europe is that fiscal union is required relatively soon to avoid another crisis in the Euro into which the UK will be drawn.

We remain under weight Europe although a UK exit and modest success in the economy (which is very likely) will perhaps be the catalyst for a necessary reappraisal of the way Europe 'functions'? Currency union needs fiscal union needs political union.

Regardless of Brexit result and the UK election, the UK needs more houses to be built. Consequently, we have initiated a position in Barratt Developments which is a builder of mid-level mid-priced (sic) housing in the UK. The housing stocks were heavily sold down on the threat by the Labour party to nationalise/confiscate a lot of assets in "private" hands. This would presumably include the un-used land banks of the housebuilders. This selling is illogical and now the valuations are compelling.

We own 30 stocks across a representative section of sectors and regions. We have a value bias and avoid concept stocks especially loss-making ones. We prefer companies which invest adequately to secure their long-term success and like dividends where that investment has paid off. We weight position sizes inversely to price volatility such that the portfolio has roughly equal amounts of risk return exposure for each stock.

Our top 10 positions by absolute weight and their local currency performance in October are listed in the table below:

If you wish to learn more about our investment approach, and how to invest in our Global, Asia Pacific or Global Listed Infrastructure equity strategies, please contact us at www.delftpartners.com