Markets in a nutshell — October 2021
Global equities rebounded after retracing in September. Investors shrugged off recurring evidence of supply-chain bottlenecks and possible peak in corporate margins, choosing instead to focus on stellar (though backward looking) third-quarter corporate earnings prints.US bourses outperformed on strong reported earnings while European stocks also rose despite energy concerns from stubbornly high gas prices in the lead up to winter.
The consumer discretionary (on strong earnings and improving China sentiment), information technology and energy sectors led equity markets higher while financials were higher on strong third-quarter earnings and rising rate hike expectations. Emerging markets lagged, with India, Korea and Brazil falling for the fourth consecutive month. But Chinese bourses gained on a reprieve in US/China geopolitical tensions and an abatement of new regulatory pressures and diminishing Evergrande related contagion risks.
At Foord we’re long‐term investors, focused on forecasting a company’s earnings many years in the future. We believe strongly that a firm’s underlying earnings will ultimately determine its value. Foord has for some time held a positive view on the rising Chinese middle class and the corresponding consumption growth. This thesis is aligned to the Chinese government’s goal of common prosperity and a ‘stronger middle’. Though mindful of never taking a 0/1 bet, at present, we currently see considerable opportunity in Chinese equities, despite the volatility. As such, the managers have invested an appropriately sized portion of the funds in what we believe are high quality, consumer-focused companies that should compound earnings over the medium to long term.
The US 10-year bond yield was flat, despite US Fed Chairman Powell acknowledging that inflation pressures might well be less transitory than previously thought. Debt markets appear to be under-pricing the increasingly probable November start to the US Fed tapering program and likely rates lift-off during 2022. The US dollar was weaker against the British pound, neutral against the euro and stronger against the yen.
Prices for industrial commodities, iron ore, copper and oil moved higher as broad based supply shortages continued against a backdrop of robust demand. Gas prices fell sharply on potential Russian supply increases, while thermal coal also retraced on Chinese price interventions. Precious metals platinum, palladium, silver and gold ended the month higher.
Foord Global Equity Fund’s outperformance of the index was driven primarily by the fund’s Chinese holdings, communication services and materials as sentiment for Chinese equities began to improve and inflation concerns drove commodity prices higher. The managers expect commodity prices to be supported in the medium term by persistent inflation. The Foord International Fund’s investment in leading global copper miner Freeport-McMoran contributed the most to fund performance while the US S&P 500 market index hedges were the largest detractors from fund returns.
The managers continue to favour equities with pricing power over other asset classes but remain cautious and partially hedged given lofty US equity valuations. The funds are well diversified and optimally balanced between protecting capital against elevated market risks and capturing the long-term inflation beating investment opportunities that we can see.