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Video: Global Sustainable Growth Q3 2023

04/12/2023

Authors

Ajani Sivapalan
Research Analyst

What drove markets in Q3 2023?

The market exuberance of the first half of 2023, largely driven by excitement around artificial intelligence, started to wane in Q3 as investors started to factor in the implications of interest rates and softening economic data alongside the increased evidence of the lagged effects of monetary and fiscal tightening over the past 12 months. This, we believe, represents a near term headwind for equity markets. But on a 12-month view, we maintain the view that economic growth will have troughed and corporate earnings will be starting to inflect positively. Until then, the market is likely to remain volatile and highly rotational.

Positioning for the current environment

For much of the year, we have remained quite cautiously positioned with an overweight exposure to more defensive areas of the market, augmenting our philosophical bias towards quality growth stocks. For us, quality equates to revenue stability, earnings resilience, and balance sheet strength, all characteristics that we believe will be particularly important over the next few quarters and years to come. In Q3, however, fundamentals didn’t appear to matter that much to share price performance as markets responded primarily to a changing macro environment and assimilation of risk and return. We continue to look through the markets short-term machinations by focusing instead on multi-year compounding underpinned by strong stakeholder relationships.

Over the third quarter, we took profits from our position in Deckers, which has performed well due to continued momentum in its Hoka brand. We added two new names, US home improvement chain Lowe’s, which has historically delivered impressive returns on invested capital and is set to benefit from both cyclical and structural growth drivers, and chip designer, Arm, which we purchased during its IPO on the basis of its dominant market position and potential growth in royalties.

Which companies has the team been engaging with?

Our investment teams have been very busy in terms of company engagement with fact finding conducted with Charles Schwab, Fanuc and Grainger, and climate-based engagement with Brazilian Stock Exchange B3 and Japan-based medical devices manufacturer, Terumo.

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Authors

Ajani Sivapalan
Research Analyst

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