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The Brunner Investment Trust PLC
Welcome to the latest update from the Trust's portfolio managers
November 2022
Why invest in Brunner?
- AIC Dividend Hero: 50 years of dividend growth*
- One of the highest yields in its sector*
- A global, actively managed equity portfolio
Monthly Fact Sheet
Welcome to our latest monthly factsheet, featuring data and commentary as at 30.11.2022
Market Review
Global equities made further gains in November, their first back-to-back monthly rise since mid-2021. Markets have taken comfort from signs that inflationary pressures are easing, as well as hopes the US Federal Reserve (Fed) will raise rates less aggressively. Sentiment was also lifted by speculation that China will start easing its strict zero-Covid policy.
Economic data showed further signs of deterioration, with purchasing manager indices (PMIs) in the US, UK, China and eurozone all registering below 50 (a PMI less than 50 indicates contraction compared to the previous month). Meanwhile, central banks continued tightening monetary policy, with the Fed bringing interest rates to 4% after its fourth successive 0.75% hike. However, investors appear hopeful that not only will future hikes be smaller but that the point at which rates will be cut may also have shifted closer.
All sectors delivered positive returns over the month. Materials and Real Estate led the pack, with Industrials and Financials also delivering strong gains. In a break with this year’s trend, Healthcare and Energy stocks were some of the weakest, albeit positive, performers.
Portfolio Review
In November, the Trust’s equity portfolio underperformed its benchmark. NAV total return was 7.1% compared to the benchmark’s 4.7%.
The biggest positive contributor to returns was Microchip. The maker of microcontrollers reported Q2 results which saw revenues and earnings both beat expectations. While sales growth for the quarter came in at 26%, management also maintained its forward guidance for the upcoming period.
Yum China also boosted returns. The convenience restaurant chain reported third quarter results which indicated growing demand for delivery and takeaway despite China’s zero-Covid policy. Overall sales grew by , outpacing the 2% national restaurant average, while profits doubled. The stock has made further gains as reopening expectations build.
Unitedhealth Group made the largest negative contribution to returns. Shares in the provider of value-based health care weakened in line with a broader rotation away from year-to-date winners. The stock also saw some temporary weakness following an adverse legal ruling, although the financial impact is limited. With the company confirming its year-on-year Earnings per Share (EPS) growth at an investor day, the shares have since rallied.
Roche also weakened returns. Shares in the biotech company fell as phase 3 of the Gantenerumab drug trial failed to show a statistical benefit in treating Alzheimer’s disease. However, the company’s growth in its diversified pharmaceutical pipeline remains strong and, we believe this should offset Covid-related revenues and biosimilar headwinds in 2023.
Significant Transactions
Over the month, we exited our small position in Jiangsu Expressway. While the stock provides a good yield, we have less conviction over its long-term growth outlook. We re-distributed the proceeds across the portfolio.
Market Outlook
Global equities continue to march to the US Federal Reserve’s tune, as they have for most of 2022. Shares have rallied for two consecutive months, due to softer inflation numbers and a dovish interpretation of the central bank’s minutes. Yet against this optimism, global economic data continue to deteriorate, as do corporate earnings expectations. Ongoing developments in China are also a healthy reminder that large parts of the world continue to be driven by factors outside of financial markets.
Markets are now pricing a peak in US interest rates for June 2023, with a steady reduction towards 4% by the end of the year. This marks a downshift from early November, after a weaker than expected 7.7% US consumer price index print. Investors have also seized on Chair Powell’s remarks that “the time for moderating the pace of rate increases may come as soon as the December meeting”. With Covid supply chain issues now largely resolved, and a further doubling of the oil price unlikely, equity markets are hopeful that these headwinds are abating.
Yet this optimism does not seem to be shared by Powell himself, who has remarked that “cutting rates is something we don’t want to do soon, so that’s why we are slowing down”. In short, higher rates and inflation may last longer than the market currently expects. At the same time, economies around the world are slowing. The International Monetary Fund (IMF) has repeatedly revised down its growth expectations and the US bond yield curve remains firmly inverted.
Companies, for their part, have done their best to manage down expectations. Across the MSCI All Country World Index, 2023 EPS growth forecasts have roughly halved according to IBES (Institutional Brokers’ Estimate System) data. Weaker demand, higher costs and in some cases a backlog of inventory that had been purchased at higher prices, all threaten to erode corporate profitability. Similarly, optimism about China’s economic reopening and its potential Gross Domestic Product (GDP) boost appear well ahead of realities on the ground. We are acutely focused on how company managements are communicating and responding to these changes.
As ever, December is rife with predictions for the coming year. Yet after a two-year global pandemic, European land war and runaway inflation, all of which were unforeseen, we are hopeful that readers share our cautious approach to the exercise. Instead, we view the above as considerations shared by the equity market and to which both the share prices of our holdings and we as portfolio managers will likely react. Yet while the market takes this more short-term view, it is by focusing squarely on longterm company fundamentals that we believe we will be able to best serve shareholders.
For the latest portfolio breakdown, performance, dividend information, please visit www.brunner.co.uk.
*Past performance does not predict future returns.
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