Global markets started strongly in January with MSCI World equities up 5.1% (in GBP). This was driven predominantly by Europe, with the best January for the STOXX50 on record, as its relative outperformance
which started in Q4 of 2022 continued. China’s reopening became another key catalyst as cyclicals caught up performance relative to Defensives and many of the top performers of 2022 became laggards in early 2023 as investor sentiment turned less bearish. The CPI inflation print in the US showed continued moderation in December, while the Eurozone saw a third consecutive monthly decline. The labour market remains tight, and
the composite PMIs are indicating we are back in an expansionary phase, driven by services. The Fed tightened by another 25bps, in line with market expectations. This prompted another rally in equities and treasuries in early February as the markets remain convinced we are approaching the end of the hiking cycle, while recessionary scenarios appear to be pushed out for now.
Looking further into 2023, improvements in supply chains, recovery in China and stabilising trends in real incomes should provide support to corporate earnings. Nevertheless, the possibility of central bank overtightening, geopolitical uncertainty and eroding savings still present risks to growth with many market observers predicting the US will slip into a recession in late 2023 or early 2024. Notwithstanding this backdrop, we remain optimistic that the Longevity Consumer is well positioned to demonstrate relative resilience in this uncertain time, underpinned by stronger savings balances among the longevity population and relatively inelastic demand for healthcare.
Portfolio positioning and performance
The Pacific Longevity & Social Change strategy returned +4.0% in January (in GBP), as the strong performance from Consumer Discretionary and Financials was partially offset by a slower month for its Healthcare holdings. The top three absolute contributors to Fund performance in January were Pets at Home, Brunswick and Booking. The primary detractors were AstraZeneca, Horizon Therapeutics and UnitedHealth.
The Healthcare sector was the weakest performer in the MSCI index in January. While our Healthcare positions
outperformed the sector benchmark this was not enough to offset the effect of sector allocation and the broader rotation out of Healthcare early in the year. Our Financials holdings were the main contributor to fund performance in January, with outperformance relative to the Financials universe reflecting our focus on European Capital Markets names. The strongest performers in Financials were Intermediate Capital and Carlyle, while Legal & General was the main laggard. ICP posted a positive AUM update which highlighted the benefits of a diversified business model and alleviated concern on the fund-raising environment. Consumer Discretionary holdings delivered another strong month driven by Pets at Home, Brunswick and Booking. Pets at Home reported a strong set of Q3 numbers, mirroring the recent reassuring updates from other UK retailers, and we expect it to be in a good relative position to continue to benefit from secular trends in pet ownership. We expect quality consumer brands to remain resilient in the near future, supported by leaner inventory levels, easing supply chain headwinds, innovation and ongoing reopening in China. Lastly, our Consumer Staples holdings outperformed their benchmark category in January but, along with other defensives, lagged overall.
Looking at the Longevity & Social Change performance by theme, Longevity Consumer was the main driver of performance for the second month in a row, followed by Education and Wellbeing. Within Longevity Consumer, Financial Planning was the strongest contributor followed by Travel and Leisure and Companionship. Education and Wellbeing also saw a positive performance across most sub themes, led by Screening and Aesthetics & Vision and Fitness & Nutrition. The weakest areas were Pharmacy within Healthcare and Health Insurance within Later Living Categories.
As the world emerges out of the pandemic, ongoing challenges are presented by persistent inflation, tight labour markets and higher costs of financing. Despite this, we believe the outlook for the Longevity and Social Change universe remains robust. Across the globe, populations continue to age and this creates opportunities for companies that provide products and services which cater to changing consumption patterns driven by shifts in demography. With the cost of capital climbing and inflation still running high we believe companies with strong management a track record of execution prove to be good long-term investments. We remain focussed on identifying high quality companies with proven operating models and strong innovation characteristics that have exposure to the durable and resilient growth offered by the Longevity and Social Change theme.