The MSCI World equities index was up 3% June (in GBP), driven by gains in the US, as the debt ceiling stalemate became resolved, while Europe surrendered some of the earlier outperformance. Economic data remained largely supportive, with continued resilience in the jobs data and signs of moderating inflation in the US and Europe. Services remain the growth engine, supporting employment at high levels and largely offsetting softer trends in manufacturing. The effects of moderating raw materials prices, resilience in services and strong consumer capital positions will gradually fade through 2023, while tighter credit conditions may begin to translate into weaker jobs data, setting the stage for a Fed pause. There are some emerging signs of a weaker US consumer with corporates noting downtrading and softer demand. While recession remains a possibility, few market participants expect it to be a deep one as the stimulus provided during the Covid period and associated wealth effects will continue to act as a cushion.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy underperformed its global benchmark in June, driven by our Consumer Discretionary and Staples holdings, which more than offset strong relative performance in Healthcare. The strategy’s minimal exposure to the technology and communication services sectors continued to weigh on performance as optimism around the potential impact of Artificial Intelligence continued. While many of our holdings are already leveraging AI and we are confident that many more will be able to harness AI to enhance their products and services, very few have participated in the current rally. On a stock level, the top three absolute contributors to Fund performance in June were Brunswick, Icon and Align Technology. The primary detractors were Humana, Adtalem and Reckitt Benckiser. Looking at the Longevity & Social Change performance by theme, Longevity Consumer delivered the strongest gains, driven by Travel & Leisure and Financial Planning. On a company level Brunswick, part of Travel & Leisure theme, was the top performer while Legal & General, part of the Life & Non-Life Insurance, was the main laggard. For Brunswick stable pricing discipline, resilience in premium products and updates from RV manufacturers reassured the market that margins may be more resilient to volume declines than in prior cycles and that worst case EPS scenarios are likely avoidable. Legal & General remained under pressure, as the appointment of an outsider to the CEO role surprised some market participants and with broader market concerns on persistently high UK inflation adding to the pressure.
Healthcare delivered a solid performance, led by Medical Devices and Drug Development & Manufacturing with strong gains in Icon, Conmed and Catalent. Pharmacy performance was held back by AstraZeneca and Eli Lilly with the former reflecting investor nervousness ahead of a late-stage data readout for a pipeline asset.
Education & Wellbeing had a positive month but saw divergent performance across subthemes. Aesthetics & Vision led with gains in Align Technology and Ulta Beauty. In Screening Exact Sciences provided a confident investor day update and a positive read out from its Cologuard 2.0 screening test, also lifting peer Guardant Health.
Fitness & Nutrition was boosted by lululemon which delivered a Q1 beat and raised full year guidance, driven by a sharp recovery in China and still resilient growth even in the more mature geographies including the US. Education was the weakest performing subtheme. Adtalem’s first investor day, while broadly reassuring on long term targets, indicated a softer than expected FY24 outlook for margin. We remain confident in secular drivers of Adtalem’s business as labour shortage in the US healthcare systems is likely to grow as the population ages and current practitioners retire. Later Living retracted as weakness in Health Insurance more than offset positive trends in Home-health & Nursing and Care Services. On a company level, Humana and United Health, both part of the Health Insurance subtheme, were the main laggards. Both companies provided financial updates indicating elevated outpatient activity was likely to lift Medical Loss Ratios. While Humana and United Health both reiterated FY23 EPS guidance, concerns over FY24 pricing and utilisation are likely to linger until Q3 when both companies will have better visibility on medical cost trends.
Outlook
Heading into the second half of the year, the macro picture remains mixed. On one hand there are signs of broadening weakness in the US consumer, uncertainty on the pace of recovery in China and deteriorating business sentiment in Europe. On the other hand, services demand remains resilient, US business sentiment surveys ticked up, destocking cycle is likely coming to an end and housing activity is stabilising. In this uncertain backdrop, we remain confident in our resilient and defensive portfolio positioning and believe the outlook for the Longevity & Social Change universe Identifiers remains secure.
