The MSCI World equities index was up 2.2% July (in GBP), led by emerging markets, and positive performance in the US and Europe. Strength broad based across the sectors, with the largest gains in Energy and Communication Services and more muted gains in Healthcare, Utilities and Staples. Markets continue to embrace the ‘goldilocks’ scenario, supported by resilient economic data and continued strength in the job market, while inflation is cooling both in the US and Europe. Services remain the area of strength, supporting employment at high levels and largely offsetting softer trends in manufacturing. Both the ECB and the Fed hiked by 25bps and current forecasts assume further hikes in September are possible, underpinned by resilient Q2 GDP data. It is difficult to assess how much of this data is obscured by fiscal stimulus, particularly in the US. The effects of moderating raw materials prices, resilience in services and strong consumer capital positions will gradually fade through 2023, and tighter credit conditions may begin to translate into weaker jobs data. While recession remains a possibility, few market participants expect it to be severe, as the stimulus provided during Covid and associated wealth effects will continue to act as a cushion.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy performed broadly in line with its global benchmark in July delivering a 1.9% return (in GBP), supported by our Consumer Discretionary and Financials holdings as well as limited exposure to IT. While Healthcare was one of the weakest performing sectors, our holdings delivered strong relative gains. On a stock level, the top three absolute contributors to Fund performance in July were Adtalem Global Education, Axonics and Tandem Diabetes. The primary detractors were Conmed, Ulta Beauty and HCA Healthcare.
Looking at the Longevity & Social Change performance by theme, Longevity Consumer delivered the strongest gains, driven by Financial Planning and Travel & Leisure. On a company level, Booking Holdings, part of the Travel & Leisure sub-theme, was the top performer while St James’s Place within Financial Planning, was the main laggard. Booking has since reported a stellar set of Q2 results, which drove continued gains in the shares in August, backed by upgrades to earnings. The company noted resilient demand for leisure, improved profitability on the back of a higher share of the DTC channel and a strong start to the Q3 booking season. For St James’s place, while the underlying earnings and flow trends were not dissimilar to its broker peer group, most of the underperformance stemmed from a compression of valuation on the back of management’s decision to reduce fees for certain products. The reaction seems outsized relative to the underlying impact on earnings, however we are assessing further the longer-term implications of management’s fee changes.
Education & Wellbeing was the second largest contributor to performance, almost entirely led by the Education sub-theme, while Fitness & Nutrition and Hygiene & Personal Care lagged. In Education, Adtalem Global Education saw a strong rerating, with contribution to performance amplified by our tactical increase in position in the prior weeks. EssilorLuxottica posted a reassuring Q2 print, with weakness in North America more than offset by strong performance in the rest of the world. The company remains on track to deliver synergies from Grand Vision integration with resilient pricing trends offering support to margins. Basic Fit was the main laggard in Fitness & Nutrition as the market grew concerned over slowing membership growth on the back of higher churn. We believe some of this is temporary and continue to see good value in this fast growing gym operator, which should also benefit from lower energy costs. Hygiene and Personal Care and Screening delivered broadly flat performance.
Healthcare delivered a solid performance, led once again by Medical Devices and Drug Development & Manufacturing with strong gains in Axonics and Tandem Diabetes. Conmed was the main laggard, reversing some of the strong gains seen this year, despite delivering a second quarter beat and raise.
Later Living saw a divergent performance across the sub-themes, with strength in Health Insurance and Funeral Services partly offset by Care Services. On a company level, United Health and CVS Group, both part of the Health Insurance sub-theme, were the main gainers. Following the cautious commentary provided in June, UnitedHealth reported a strong quarterly update and guided for a better than feared medical cost outlook. HCA Healthcare, part of the Care Services sub-theme lagged, reflecting a pause in the steep re-rating seen to date.
Outlook
Heading into the second half of the year, the macro picture remains uncertain. There are continued signs of weakness in the lower-income US consumer, uncertainty on the pace of recovery in China and divergent performance of economies in Europe. The earnings season was broadly positive but stock correlation is low, highlighting the importance of stock picking in the current market. In this uncertain backdrop, we remain confident in our resilient and defensive portfolio positioning and believe the outlook for the Longevity & Social Change universe remains secure.
