The MSCI World equities index was down 0.6% in February (in GBP) with European benchmarks maintaining the positive momentum seen in January, while US and Chinese indices gave back some of their recent gains. Latest CPI and PCE inflation prints exceeded expectations and, coupled with stronger consumer spending and confidence data, this paved the way for the market to price in an extended tightening cycle. Most Economists see the likelihood of a near term recession as low, as employment remains high, China recovery is gathering pace and corporates are in a relatively good shape with strong balance sheets and pricing power. Looking further into 2023, the possibility of central bank overtightening, geopolitical uncertainty and eroding savings still present risks to growth, with many market observers predicting the US will slip into a recession in late 2023 or early 2024. Notwithstanding this backdrop, we remain optimistic that the Longevity Consumer is well positioned to demonstrate relative resilience in this uncertain time, underpinned by stronger savings balances among the longevity population and relatively inelastic demand for healthcare.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy returned +1% in February (in GBP), outperforming its global benchmark with strong alpha generation across all of its focus sectors – Healthcare, Consumer Discretionary, Financials and Staples. On a stock level, the top three absolute contributors to Fund performance in February were Catalent, Pets at Home and Transmedics. The primary detractors were Service Corp, Tandem Diabetes and Columbia Sportwear.
While the Healthcare sector remained out of favour in February (-3% in GBP), our Healthcare holdings outperformed the benchmark and delivered a positive return. Catalent was up sharply on bid speculation, Transmedics reported a strong close to the year and Align rerated after a Q4 which showed upside on most key metrics including a sequential improvement in the volume of aligners. The strongest performers in Financials were Julius Baer and UBS – two beneficiaries of the ongoing rates tightening in Europe and (further out) reopening in China. Consumer Discretionary holdings delivered another strong month driven by Pets at Home, Brunswick and Booking. Booking reported a strong Q4, which confirmed further share gains and still resilient travel spending. The result was underscored by a commitment to a sizeable share buyback over the coming years.
Looking at the Longevity & Social Change performance by theme, the Longevity Consumer was once again the top contributor, followed by Healthcare. We expect quality consumer brands to remain resilient in the near future, supported by leaner inventory levels, easing supply chain headwinds, innovation and ongoing reopening in China. The Later Living theme was held back by Funeral Services and Health Insurance while Education & Wellbeing saw weakness in Screening.
Outlook
As we move through 2023 ongoing challenges are presented by persistent inflation, tight labour markets and higher costs of financing. Despite this, we believe the outlook for the Longevity and Social Change universe remains robust. Across the globe, populations continue to age and this creates opportunities for companies that provide products and services which cater to changing consumption patterns driven by shifts in demography. With the cost of capital climbing and inflation still running high we believe companies with strong management and a track record of execution should prove to be good long-term investments. We remain focused on identifying high quality companies with proven operating models and strong innovation characteristics that have exposure to the durable and resilient growth offered by the Longevity and Social Change theme.
