Summer Global Equities

Global equities performed well in May. Developed markets posted a 4.5% return whilst emerging markets saw flat returns. Inflation reports varied by market; some markets continue to experience persistently elevated levels of rising prices while others are beginning to see inflation slowing. The first interest rate cuts were made by central banks in Canada, the EU and Sweden over recent weeks.

The US first-quarter earnings season posted results that were on average 8.3% higher than analyst expectations, the largest outperformance since the first COVID-19 vaccine announcement in Q4 2021. Revenues only just beat expectations by 1% so companies saw earnings growth from expanded margins on the back of good cost control and passing on input cost increases.

European corporate profits also surprised to the upside. With more attractive equity valuations we have observed investors allocating capital to that market. European equities returned 3.6% while UK shares returned 2.4% over the month.

China continues a period of modest improvement on the back of new government programmes, but the property market remains weak and consumer confidence low. Japan performed poorly, with weakness in the Japanese Yen importing inflation on foreign goods’ purchases, and this weighing on consumer confidence.

The NZ dollar has strengthened against major currencies, offsetting some of the equity market gains when translated into our currency.

How did your portfolio perform?

Summer Global Equities delivered a return net of fees and before tax of 0.04% in May for the 12 months to the end of May the fund delivered a return net of fees and before tax of 17.93%.

All three of our managers underperformed the market index over the month.

Growth stocks outperformed Value stocks by 2.4% over the month. Most sectors reported material gains, except for the Energy sector. The strongest gains were linked to technology stocks and the communication services sector.

Underweight Samsung Electronics and overweight HP (Hewlett Packard) aided performance. HP outperformed due to strong quarterly earnings while Samsung Electronics declined after losing market share to rival chip maker SK Hynix in the production specific AI silicon.

Nvidia and Apple helped drive market performance; our managers have limited exposure to those companies on valuation grounds.

The fund is hedged well above target levels, which benefited returns as the NZD rallied over the month.

We actively manage the fund’s foreign currency exposures. As at 31 May 2024, these exposures represented 98.33% of the value of the fund. After allowing for foreign currency hedges in place, approximately 53.81% of the value of the fund was unhedged and exposed to foreign currency risk.

A year ago the market view was that the high interest rates needed to tame inflation would lead to reduced profit margins and job losses, combining to create a global economic slowdown or even a recession.  

Only parts of that view have played out. In general, those countries where homeowners and businesses fund their activities with short term debt (NZ, Australia, UK and parts of Europe) have seen considerable economic weakness. Countries with longer term debt – think the US where 30yr fixed rate mortgages are common – have seen only modest economic slowdowns. 

Inflation is visibly on a downward trend, albeit bumpy. Price falls have only just reached levels allowing central banks to cut rates and alleviate the strain on weakening economies.

As rate cuts have now begun the bottom for economic growth should be closer. This will support corporate earnings in time. Unfortunately, in our opinion, the US, which makes up over 60% of the global equity market, is trading expensive relative to history, interest rates and normalised earnings.