An underweight position in Iron Ore and Energy companies made up almost all of the difference in relative performance as BHP Group (not held) in particular, gained +11.7% during the month as its London and Australian listing unified. The Fund does not hold BHP Group or Energy companies due to their fossil fuel exposures. During the month the market decline also saw some of our major positions underperform (eg: BlueScope Steel down 12.5%, Macquarie Group down 10.6%, GrainCorp down 11.9%) and we used the opportunity to add to existing positions.
Following the record monetary stimulus through global central banks since the start of 2020 the economic cycle is alive and well with the latest observation being the stronger than expected labour report in the USA on Friday 4th Feb 2022 (476,000 jobs added last month vs 150,000 expected).
While the economic cycle strengthens and the market anticipates monetary tightening, it has driven volatility and we have used the time to introduce a number of new opportunities in some high quality companies that had previously been too expensive. We have been analysing some of these companies for more than three years and never bought a share until now when their valuations have become relatively attractive.
Turning to valuations, over the last two years in particular the PE expansion we witnessed in markets (that was driven by low levels of economic activity as well as no inflation) drove what we believe was the last big move in a decade long cycle of re-rating growth oriented equities. Investors pushed the price of any company that could demonstrate earnings growth to unprecedented premiums.
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