Attentive readers of this letter will remember two months ago we wrote, “October was a bad month in global equity markets”. Well, December was worse. The MSCI World Index, which is one of the fund’s benchmarks, returned -7.44% in GBP. October had been the worst single month since the re-launch of the strategy in May 2012. It held that title for one month only.
There were more records in December too. Christmas Eve this year fell on a Monday, squeezed between a weekend and two bank holidays. About half the global markets we trade in were closed that day and the rest had a half-day. Sounds like a recipe for a quiet day in markets? In fact it delivered the largest single one-day gain in the history of the US Dow Jones Industrial Average. That index is a cool 133 years old.
With the delayed input from the closed markets, it was Boxing Day before this gain was reflected in the MSCI World Index. That too was a record since the re-launch of the strategy at least. So our best ever single day occurred near the end of our worst ever single month.
This isn’t actually that surprising. Sharp moves often come with sharp volatility. Thin trading volumes over the holiday period exacerbate the situation. The cause of the volatility though is worth discussing.
Against a backdrop of increasing questions over global growth, stock markets finally responded to the erratic behaviour of US President Donald Trump.
The Democratic Party took control of the House of Representatives in elections in November. After various rumours, Defence Secretary Jim Matthis finally resigned in December. He was seen as the last stabilising influence on the President. Trump is now somewhat contained by the Democrats and unconstrained by wise counsel. He has been at his most chaotic.
So we are often asked about the impact of political and regulatory risk on our strategy. It is a valid question since we are trying to invest with the grain of social change.
The answer is that we don’t try to second guess political impact. We have outperformed and underperformed through political cycles with no clear pattern of preference. Delivering sustainability is an evidence-based challenge. So it feels like evidence-based policies should be helpful. But none of our investments are reliant on policy.
The little brother to political risk is legal and regulatory risk. This is much more stock-specific, and again our instinct is to avoid it. However, in some of our thematic areas it goes with the territory. By coincidence, we had two examples of this in December. Both were in the US healthcare market, and both involved legal rulings.
In Texas, a judge ruled that the Affordable Care Act (ACA) was unconstitutional. The ACA extended health insurance coverage to millions of poor Americans. One of our companies, Centene, has been a beneficiary of the ACA so its stock sold off as a result. The ruling is unlikely to stand in our opinion.
But even if it does, our long-term view is that somehow care has to be provided to those people. Centene is the best at doing this. This legal setback is just a speedbump on the longer journey.
Meanwhile a Federal Judge provided another adverse ruling against investee company CVS. The judgement cast doubt on the legality of its merger with Aetna. CVS helps to reduce the cost of healthcare by driving down the prices of drugs, and providing cheap access to medical advice. Aetna is an insurance company. The combination has the potential to catalyse a wholesale change to the US health industry. Again, we think the ruling is unlikely to stand. Again, this is just a small chapter in a broader, long term narrative.
Time will tell whether US political chaos is the defining frame for global investing in 2019. If it is, we can surely expect more of the volatility we saw in December. And probably the same negative market direction. Legal and regulatory risks are a more permanent part of life. We will continue to use our long-term sustainability frame to navigate them both.