Global Security Fund Monthly Report – October 2023

Increased geopolitical concerns and diversification when needed. Strong reports for the fund's sector yielded a return of 5.26 % for the month.

Proceed Carefully - The words are FED's Jay Powell's and were repeated several times at the latest interest rate announcement. The expression is also indicative of both the economic environment and the geopolitical situation. Geopolitical risk is a factor that must not be underestimated and is likely to have a significant impact on the stock market going forward.

The situation in Gaza has, of course, dominated the month and affected global stock markets. The risk of continued spread in the region is still high.

Diversification at geopolitical risk 

Geopolitical risk is a recurring theme in communication from banks and asset managers, but concrete advice on how to manage this risk is lacking. Historically, assets such as gold, government bonds and exposure to the USD have provided some protection against geopolitical risk. In the same way that it is possible to derive inflation protection through commodity exposure, protection against geopolitical risk can be derived through exposure to defense and security companies. The fund is an alternative that works and also has good return expectations over time.

The fund is illustrated below in dashed orange and has performed better than its benchmarks but also the defense industry index. This with limited dollar exposure.

Additional ett dominant feature for the month has a rapidly rising yield on long US Treasuries, from the 10-year. This has resulted in negative price trends for government bonds, which thus offered no geopolitical protection during the period. This has also had a negative impact on the stock markets. Together, this has likely contributed to the rise in gold, which is the asset with the best performance during the month of October. Gold is a good alternative investment that provides good risk diversification but not of course against geopolitical risk.

Company development and reports 

During the month, companies haveeven quarterly reports have come and they have generally been positive. Among the Magnificent 7 (Microsoft, Apple, Alphabet, Tesla, Amazon, Meta, Nvidia), portfolio company Microsoft stood out and beat expectations in all segments. Cloud growth (Azure) was particularly positive, plus 29 % compared to the previous year. Microsoft is well positioned going forward.

Company in the portfolio outstanding during the month was RTX. The company was up 13.1 % during the month, which also coincided with a substantial share buyback program. Lockheed Martin was up 11.2 % during the month partly as a result of geopolitical developments, partly because the report beat expectations. It is clear from the larger defense companies that the higher growth has not yet translated into order books and above all revenues. Procurement takes time, as does production. These are longer-term trends, which contributes to the fact that the shares are not so highly valued yet, which is positive. Booz Allen (9.8 %) and General Dynamics (9.2 %) were additional companies that both returned strongly during October.

Only seven companies had negative returns during the month and they were cyber security companies as well as Boeing, Honeywell and the Kongsberg group. The cyber security company Cloudflare had a negative return of 10.1 % followed by ZScaler in the same segment. Cyber security companies are of course developing negatively with rapidly rising long-term interest rates as valuations are negatively affected. However, Zscaler is still strongly up for the full year (48.3 %) and Cloudflare (46.7 %).

Proceed carefully 

We have continued inflation, high interest rates and continued risk of recession. In addition, we have de-dollarization so there are no shortage of challenges ahead. At the same time, equity investments are almost impossible to time and even if the climate is very difficult to assess with many major challenges, it can also be when it is worth taking a risk. Regardless of how you choose to act, it's good to have protection against risks that feel obvious in this stock market climate. Consider what Global Security can do for your portfolio and feel free to contact us to see the outcome.

November and December are historically strong months on the stock market, it will be interesting to see the outcome the macroeconomic environment.