During June, our net asset value return was 2.7% and shareholder returns were -1.4%, in comparison to the FTSE All-World Index return of 3.0%.
June was a positive month for equity markets, with technology stocks seeing significant outperformance. The narrow equity rally, led by ‘the Magnificent Seven’ (Alphabet, Microsoft, Amazon, Apple, NVIDIA, Meta and Tesla), has proved to be particularly supportive of US stocks despite rich valuations, high (and rising) interest rates and the ongoing risk of US recession later in the year. US inflation continued to moderate, with headline consumer price inflation declining to 4.0% from 4.9% in May, largely driven by base effects. However, labour markets remain tight (nonfarm payrolls rose by 339,000 jobs versus market estimates of 195,000), and inflation has proved to be more persistent in Europe and the UK. The UK experienced another upward surprise to inflation, with a year-on-year increase of 8.7% in May, prompting an unexpected 50 basis point hike from the Bank of England and spurring speculation that interest rates may need to rise to levels in excess of 6.0% to bring inflation back to target.
Technology stocks outperformed significantly again in June, supported by the view that US bond yields have likely peaked and are recovering from the poor performance of 2022. Companies like NVIDIA, Microsoft, Alphabet and Meta are all expected to benefit from the adoption of artificial intelligence (AI), which has acted to boost earnings expectations for the sector. Industrial metals and mining also performed well in June, reflecting a moderate pickup in commodity prices during the month. In contrast, pharmaceuticals and biotechnology lagged, with defensives underperforming more broadly following relatively strong economic data over the year to date.
On a regional basis, returns were mixed, with the US (+3.9%) outperforming the FTSE All-World Index (+3.1%), Europe (2.5%) and the UK (+1.4%). As was the case in May, the relatively high technology weight in the US was supportive of returns. The fact that US inflationary pressures have diminished much more quickly than elsewhere also acted to support US stocks. UK large-caps have struggled this year, despite cheap valuations, with miners mostly to blame. With the prospect of recessions in Europe and the UK still a prominent concern, equities in these regions have lagged. As UK interest rates are likely to rise higher, sterling was stronger over the month (+2.1%), curbing gains for UK investors.
Vertiv Holdings (+25.1%), a provider of equipment and services for data centres, which is held at an overweight to the benchmark, was the most significant contributor to relative returns during June. Vertiv has been a beneficiary of the recent technology rally, with management already “distinctly seeing the first signs of the AI investment cycle in [their] pipelines and orders”. Indeed, AI applications will require data centre infrastructure capacity to increase across the industry; therefore, Vertiv is well-positioned to benefit from this theme. Furthermore, the company reported revenue growth of 32% year-on-year in the first quarter, surpassing consensus expectations. Our underweight position in Tesla (+25.1%) was the most significant detractor from relative performance during June. Tesla reported second-quarter deliveries of 466,140 units (4.0% higher than Bloomberg consensus forecasts) at the end of June, painting a better picture of demand for Tesla vehicles than was the case in the first quarter, when prices were slashed in response to growing competition in the electric-vehicle market.
We ended the month at a discount of 9.6%, widening from a discount of 6.0% at the end of May. Net gearing continued to be conservative at 4.0% (with debt at fair value and excluding holdings in short dated gilts) for month-end, reflecting our expectation that markets will remain volatile in the short term. Nonetheless, F&C Investment Trust’s corporate structure makes us well-placed to withstand further market volatility, and we remain focused on the long-term opportunities for the benefit of our shareholders.