International Equities
Share markets remained volatile during light trading in August (thanks to the US & European summer holidays), with the MSCI World Index (in local currencies) rising 3.6% during the first half of the month before giving those gains back and more in the second half. The Index ended the month down -4.3%. Most eyes were on central bankers, and particularly the Federal Reserve that returned to its annual retreat at Jackson Hole, Wyoming for the first time in three years.
In his opening speech on 27 August, Fed Chair Jerome Powell made it clear that fighting inflation is the Fed’s top priority and that even if some “pain” is required, the central bank will continue raising interest rates for some time. Many investors in the July rally had been expecting the Fed to pivot to interest rate cuts later this year due to recession fears, but Powell’s message changed that view quickly, causing equity markets across the world to fall for the remainder of the month.
During August, our best performer was Uber (+22.7%), which continued its strong performance after reporting excellent earnings in late July. BlackRock (+11.1%) performed well which led us to exit the position with the view we might get an opportunity later in the year to buy the stock at a more attractive valuation.
Horizon Therapeutics was our weakest performer on the month, falling -28.6% after reporting earnings growth in its key Tepezza franchise for thyroid eye disease that fell short of the market’s expectations. We believe this slowdown in Tepezza’s growth is temporary and that long-term investors who continue to hold their positions, as we have chosen to do, will be rewarded for their patience over time.
New Zealand & Australian equities
The New Zealand share market put in a solid but not spectacular performance in August, appreciating +0.9% as measured by the S&P/NZX50. The performance is particularly pleasing given the weak lead from offshore markets.
During the second half of August, the majority of companies listed on the local exchange report their financial results. More specifically, companies with a June year-end report their full year financial results and the few companies with a December year-end report their first half results. Interestingly, the two largest contributors to performance during the month were not scheduled to release their results as they both have a March financial year-end. Needless to say, this is a little unusual.
Infratil made the largest positive contribution to portfolio returns in August. The funds have a sizeable allocation to this infrastructure investment company, and its share price rose +8.0% in August. At the start of August, Infratil announced a capital raise for one of its portfolio companies - Long Road. Long Road is a US-based renewable energy developer and operator that has been on a strong growth track since its establishment in 2016. We were optimistic that the firm would raise capital at a high price because of its track record and lofty growth ambitions but were still impressed with the US$2bn valuation achieved, which is a staggering 40 times its forecast 2023 EBITDA.
The other strong positive contributor was Spark, which was up +6.3% for the month. Spark has been a strong performer since it announced the sell down of its cellular towers business in July, but the company enjoyed another boost to its share price when it forecasted a 27 cents per share dividend for 2023. The company has paid 25 cents per share for over five years, so news that it could recommence dividend growth was warmly received by the market.
Fisher and Paykel Healthcare was the largest drag on performance for the portfolio in August, declining -8.3%. The company provided guidance for their first half financial performance, which ends at the end of September. It warned the market that their financial year had started slower than expected and that the already downgraded expectations were too optimistic. Fisher & Paykel Healthcare enjoyed massive tailwinds from Covid-19, and we see its current challenges as an opportunity and, as a result, are happy to continue to own shares in the company. Fortunately, the funds hold a smaller position in FPH relative to the benchmark and as such they were somewhat insulated from the full impact of the share price decline.