The Swell Global Portfolio increased 9.93% in the 12 months to November 2021 in a year that was extremely unpredictable and volatile. The top Portfolio performers in the year were Alphabet, Microsoft and S&P Global. The bottom performers were Zillow Group, Alibaba and Intel. Although Alibaba is no longer a holding, we remain confident both Zillow Group and Intel will provide long term earnings growth for the Portfolio.
Over the same period, the comparison index, the MSCI world net total return (AUD), increased 26.55%. The strongest contribution in the MSCI came from energy stocks. Energy prices rose in response to the global economy coming back on line after northern winter shutdowns early in 2021.
Government and central bank policy responses
Increased energy costs and inflationary pressures are impacting economies differentially around the world. We do not expect central banks to maintain their uniformity of responses to the pandemic which were evident over the last two years. Instead, central banks in each country will consider the speed of economic recovery, debt levels, current COVID-19 infections and vaccination rates and local market conditions when setting policy.
In the US, the Federal Reserve will continue to taper asset purchases in the near term. Markets have factored in up to three interest rates rises over 2022. Labour shortages, increased wages and supply disruptions are stalling business recovery at the same time they are pushing up prices. However US households accumulated an additional 12% in savings during the pandemic. That means the market should tolerate inflation in the short term. However, competition will restrict some businesses from passing on their additional costs to consumers.
The ECB remains accommodative and continues to support economic growth. The wage pressure evident in the US is not yet obvious in Europe. Nevertheless, increased vaccination rates following government mandates will encourage economies to open up. Despite that, the outlook for growth is well anchored at or below 2%.
China’s central bank has signalled an interest rate cut in response to a slowing economy. Japan’s new government is grappling with stubbornly low inflation and continues to push stimulus measures.
Inflation is notoriously difficult to predict, and stated, a consistent global rate is unrealistic. If inflation were to persist, we are confident the high quality companies in our Portfolio have the capacity to lift prices to accommodate rising costs as they offer more value to their customers. Similarly, we expect long term interest rates to remain low. This is predominantly due to current levels of government debt but also the costs of an aging population. The proportion of the world’s population over 60 is set to reach 22% by 2050.
During 2021 investors prioritised return over risk. They favoured companies and industries hit hard in 2020 which began to emerge from the pandemic in 2021. Unpredictable gains and losses ensued, pushing share prices and market indices to record highs.
Consensus earnings estimates forecast growth for companies in the MSCI index to decelerate from 94.4% in 2021 to 6.58% in 2022. In contrast, the same consensus estimates predict earnings growth for companies in the Swell Global Portfolio, which were 33.0% this year will be 21.6% next year.
Our investment thesis is to hold a concentrated portfolio of quality companies with the capacity to generate capital growth over the long term. These companies are both driving and harnessing structural trends to enable them to continue to grow earnings irrespective of the macro economic outlook. Their strong balance sheets provide capacity to absorb the additional costs all businesses will experience next year, but their competitive market positions and superior product and service offerings position them well to pass on higher costs to their customers.
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