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Focus on long-term company fundamentals

Oksana Patron15 August 2022
Large versus small coin piles

The August reporting period should serve as a reminder that the mid to long-term company fundamentals are more important to share prices than macro news flow, according to Tribeca’s Alpha Plus Fund’s portfolio manager, Jun Bei Lui.

Despite the volatility, the first half of 2022  in equity markets led to a meaningful contraction in valuation multiples, even though for the first time in a decade the market was working against both interesting rates and economic growth fears as central banks had been trying to combat inflation at any cost.

Although macro events continued to dominate news flow in July as central banks persisted with rate hikes (RBA +50bps and Fed +75bps), several softer consumer data prints, and a second consecutive quarterly decline in U.S. Real GDP, softened investor expectations of the steepness of future rate hikes.

“This slight dovish pivot by the market provided relief to stocks and sectors that have been most heavily impacted by rising discount rates this year, creating some spectacular reversals amongst the most beaten down names,” Liu said.

As far as the a sector perspective July  was concerned, it was almost a mirror image of the June sell-off, with the best returning sectors being IT (+15.2%) and Real Estate (+11.9%), but both sectors that have underperformed notably calendar year-to-date.

At the same time, financials (+9.3%) also contributed materially to the positive move in the index as investors weigh a trade-off between improving NIMs and worsening volume growth on a deteriorating housing outlook.

Overweight positions that contributed positively included: Pinnacle Investment Group which is a beneficiary of rising markets and rallied into its full year results; Johns Lyng Group, a new addition to the portfolio which bounced back strongly following a sudden de-rate in May/June; and Xero which benefited from a rotation towards high growth tech stocks.

Underweight positions that contributed positively included: Rio Tinto which followed the iron ore price lower during the month on more China covid lockdown worries; and Transurban, which had proved very defensive during the prior months’ sell-off and hence didn’t benefit from a market bounce-back.

“On the flipside, key detractors included overweight positions in: Viva Energy which sold off on concerns around deteriorating refining margins, and Graincorp, which has outperformed materially year to-date and saw some profit taking as investors rotated into beaten-down names. Underweight positions which negatively impacted performance included: Nanosonics and Ansell, both of which had large short interest and squeezed higher during the month,” Liu added.

The Tribeca Alpha Plus Fund returned +4.42% in July, underperforming its benchmark by 1.33%.

Commenting on the outlook, Liu said: “In the near-term, we expect volatility to persist as uncertainty around the macroeconomic outlook remains elevated and the tug-of-war between inflation and growth continues.

“However, we see plenty of opportunities to invest, with compelling value in good quality stocks alongside our ability to go short names where we think either valuation or earnings risks are not priced in.”

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