Global equities

Global equities – May 2022 results

22 Jun 2022 | 3 minutes read
Ted Alexander
Portfolio Manager
& Head of Investments

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Stock markets were moderately down again in May, falling 5% in the first half of the month and rallying back to end -1.4% down (MSCI World Index (Net) in Australian dollar (AUD) terms). For the first two weeks of May there was a continuation of this year’s trend: falling stock markets on inflation concerns. In addition, strict COVID-19 lockdowns in China hit stock markets. Markets rallied later in the month on some signs that inflation may have peaked and restrictions eased in China. The big debate is where and when interest rates will peak in this period of central bank rate rises, which flows through to bond yields and mortgages. Later in the month, we saw this outlook moderate a bit, which at the moment is a positive for stock markets. But continued high inflation will dampen any market enthusiasm, and we are monitoring economic data closely.

With only moderate market movements, and our cautious positioning, the Orca Global Fund performed in-line with its benchmark, the MSCI World Index for the month of May, but over the last 6 months the Fund has outperformed by 6.1%1. The Orca Asia Fund was 0.9%1 ahead of its benchmark the MSCI Asia ex-Japan Index for May, and 2.1%1 ahead over 6 months. Finally, the Orca Global Disruption Fund was 4.0% behind its benchmark the MSCI AC World Index for the month and 27.5% behind over 6 months – it has been a rough period for high growth disruptive and tech-related stocks.

Companies finished reporting their first quarter results in May. High inflation raises prices, which comes through generally as stronger sale revenue for companies, and this was true for the quarter, with revenues up 16% vs 2021. The problem is that inflation also raises costs, which makes it harder to make a profit. As a result, company profits only rose by 1.1%. We view this as in-line with our expectations for the quarter.

Our team covers around 200 stocks and the main threads from the most recent quarterly results, which we believe are important to highlight, are as follows. Firstly, there were widespread issues with cost pressures from inflation hitting inputs, transport, and labour. Company management across the board were uncertain what the rest of the year would deliver, and how well consumers would digest higher prices.

Although there’s been less coverage of supply chain issues, many companies are still struggling to get their products manufactured, and commonly are holding aging inventories that are harder to sell. Finally, many companies who had strong profits previously driven by China have struggled this year with lockdowns and political obstacles.

June is a quiet month generally for stock markets, with little in the way of company reporting, and this year has been a bit slow in terms of IPOs and M&A. Although the market’s attention is on inflation and central bank policy rates, that’s a slow game that will take a few years to play out. In our view, this favours a balanced position of active stock selection and risk control to benefit from market upside and protect investor capital against volatility.

The Orca Global Fund and Orca Asia Fund have outperformed their benchmarks since inception, and have done so taking lower risk than the market, measured by beta. This efficient investment outcome of return relative to risk taken is referred to as alpha generation, and we have been proud to deliver positive alpha for our clients over the last 4 years. Our goal is to continue to generate positive alpha for our clients into the future, and we’ll work hard to try and achieve this goal.

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