12/14/2021 11:00:00 PM

Market Update - December 2021 - Global

Global Update - December 2021

In our latest video on our Global Funds, we feature Mark Devcich, Chief Investment Officer and Portfolio Manager, Guy Thornewill, Head of Research UK & Europe and Senior Investment Analyst, and Toby Woods, Senior Investment Analyst for Global and UK & Europe funds.

Thank you for all your support this year. All the best for the holiday period and we look forward to being in touch again in 2022.

Kind regards,

Mike Taylor
CEO + Founder

Transcript:

Sam De Court: Hi everyone, my name is Sam De Court and thank you for tuning in to our final video of 2021.

Today we have members of the Pie Funds international investment team: Guy Thornewill, Toby Woods, and Mark Devcich. Good evening Guy and Toby and good morning Mark. So to round off the year we thought it may be quite helpful to give you some insights into how 2021 has played out for each of our funds, as well as asking these guys to share some thoughts about the year ahead. So let's start with you Guy. Can you please share some thoughts on both the Global Growth and Global Growth 2 funds. Over to you.

Guy Thornewill: Hi Sam. It's been a good year for the Global Growth and Global Growth 2 funds. Global Growth has been a consistent performer for most of the year. And while our large cap fund Global Growth 2 did have a slower start to the year, it has been one of our best performing funds over the last six months.

So as you know we managed the portfolios on a bottom up and a thematic basis. For Global Growth, the key contributors at a stock level are big companies like ATS Automation Tooling, Bufab, Century Pacific in the Philippines, Voltronic, Traxion in Mexico, Sdiptech, SES-imagotag and Sixt. This is actually a really diversified list by region and by sector. And some of these winners have also been part of our key themes for the year, which have included digitisation, automation, renewables and pets. We also exited some of our ecommerce winners from 2020 at quite good levels, such as the BHG Group, as we did have some concerns over the sustainability of their growth in the short term, post-Covid.  We did have one very poor investment unfortunately during the year which was Avon Protection. The company suffered from some product quality issues and contract delays. And we've now exited that position.

For the Global Growth 2 Fund, the main contributors have been Apple, Microsoft, Novo Nordisk with its obesity drug and diabetes drugs, Schneider Electric in France, EssilorLuxottica which is a leading eyecare company, Shimano, ATS Automation Tooling, and again, Sixt.

Some of our key themes such as digitisation, automation, eyecare, and bikes are also represented here. And these are all companies which are global leaders in their fields. Our worst investment for 21 and this fund was Alibaba. The company did suffer as the Chinese government introduced new regulations limiting its growth and it did suffer some downgrades. We think it's now too cheap given the quality it has and we're holding out for the time being.

Our holdings in the payment theme also suffered a bit towards the end of the year. Valuations were quite high and cross border payments have been slow to recover. But we were quite quick to reduce our weightings in this area. Looking at 2022, I think there'll be some challenges like every year. We think global growth will be a bit slower, with less fiscal and monetary stimulus, supply chain issues are still there, and inflation is stubbornly high at the moment. The Omicron variant clearly doesn't help either. However, we're still really confident in our themes and the underlying positions in the Global Growth funds as we enter the new year. Many of our winners from 21 have long growth runways ahead of them, and their market positions are becoming even stronger.

SDC: Thanks Guy. Over to you Toby, and have hairdressers in the UK closed down again?

Toby Woods: Just keeping me warm for the winter.

SDC: Can you please give us a similar sort of update covering the UK and Europe Fund? 

TW: Sure. Overall we’re pretty pleased with the way it's developed throughout the year. It actually had a really strong start, but the last few months have been a bit more challenging. But even so the fund hasn’t given up any of its gains. Unfortunately, we haven't got it all right. As Guy just mentioned, we had one particular stock, Avon Protection, that was also in the UK and Europe Fund, which hurt performance more than we would have liked. But this has been balanced, I think, by plenty of winners too, both old and new positions. For instance, there's a core group of holdings, which we've been invested in for about 18 months or more, which have all actually delivered consistent performance for the funds. These include pet supply company Swedencare, which has been an old favourite, digital labels business SES-imagotag, a niche engineering company called discoverIE, and a healthcare software developer called Nexus. We also added new stocks this year that have done well so those include Bytes which is a UK IT service company, and Bufab, a Swedish industrial logistics company, which I think we’ve spoken about in this forum before. And we're pleased with the overall contribution from them. 

As we move into 2022, we've deliberately positioned the fund to hold companies that have repeatable visible cash flows. So we sold a few positions where visibility had diminished and so we feel the portfolio should be robust really in any market condition. As Guy noted, 2022 will come with its various challenges, probably particularly along the lines of potential interest rate hikes, ongoing supply chain disruptions, and the evolving Covid situation. But fundamentally, the consumer is in pretty good shape, demand is high. So I think actually European economies should enjoy more tailwinds than headwinds, so we're quite excited by the prospects.

SDC: Awesome. Thank you very much, Toby. So I'll hand it over to you now Mark. Perhaps you could share some kind of more general comments about what you've seen in 2021 and maybe some thoughts about what you might see in 2022 in markets?

Mark Devcich: Thanks Sam. Markets have been very kind in 2021. Again, it's common recurring theme, the US has again dominated the return landscape globally. So the S&P 500 is at, or very close to, record highs - it’s done nearly 25% this year. And this year has actually been driven by earnings rather than valuation, or multiple increases as we call it in the industry. And that's the opposite of what happened last year. So last year, earnings were actually down 14% across the S&P 500. And this year, they're actually expected to be up nearly 50% in 2021. And when we look across into 2022, the earnings is forecast to be up a more modest 8%.

And another kind of key feature of what we're seeing this year is that market breadth has narrowed substantially in recent months. So there's just been five stocks, Apple, Microsoft Nvidia, Tesla and Google that have actually contributed more than half of the S&P 500’s returns since April. So we've been lucky….luckily had exposure to a number of those stocks, but it's really showed the narrowing breadth of the market. And if you compare this to say the Emerging Markets index, that's down around 5% this year in 2021, and the NZX50, which is down around 3%. So it's really been a stock picking market and also a US-dominant market.

Looking through to 2022, where we start the year with a scenario of reduced liquidity, high inflation prints and also a very strong economy. And given the strength of asset markets, both property and equities, the Federal Reserve is more likely to be inclined to not let the economy overheat and try and control inflation. So this is going to mean more tapering. Tapering is probably going to be increased to 30 billion per month and the last bond buying probably potentially getting pulled forward to end sometime around the middle of the year. So we think inflation will actually moderate significantly next year as supply chains are restored, and borders reopen, allowing for the free movement of labour. So there will be some interest rate increases but we don't think they’ll need to be too dramatic to rein in inflation. And what this is likely to mean is that, and we're already starting to see this, is that speculative assets will continue to struggle as there's an increased focus on assets that have strong cash flows. We've seen this with Bitcoin, it's fallen over 20% in recent months and some high growth, non cash flow generating areas of the market really come off in terms of their evaluations - up to kind of 50% or more in certain cases. You can see this in Cathie Woods’ Ark funds, which have seen significant drawdowns in recent months. So we're really encouraged by our positions, how they’re set up into 2022, and given the valuations that we're starting with, we think it should be a strong year of performance.

SDC. Thank you very much Mark. Thank you also Toby and Guy for joining us. And most importantly thank you very much to our clients for your support this year, and for watching these videos. Have a fantastic summer holiday and we look forward to seeing you next year. 



Information is current as at 15 December 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information.? Past performance is not a reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.?