Earnings season continued in October and Q3 earnings number weren’t as bad as the market expected again (but earnings growth has been relatively lower compared to previous comparable quarters). Overall, the developed market outperformed emerging markets- MSCI World Emerging Market Index was down 3.1% and MSCI World was up 7.2%. MSCI World Value Index (9.7%) outperformed MSCI World Growth Index (4.6%) as tech companies’ earnings were lower than expected. The fund was up 2.3% for the month, finding reprieve after the negative market performance we saw in September.

The best performers for the month were Intuitive Surgical (31.5%) and Aristocrat Leisure. Despite intense competition in the medtech space, one of the companies which is positioned well to benefit from this investment theme is Intuitive Surgical. Intuitive designs, manufactures and markets the da Vinci system which is a robotic-assisted surgical systems which allows for minimally invasive surgery. The company released their Q3 earnings mid-October with the company seeing recovery in procedure growth following Covid-19 lockdowns and staffing pressures- however, headwinds from Covid-19 were experienced by the company during the period in China. Margins were negatively by the stronger dollar, inflation and supply chain issues. Management increased their guidance for FY22 procedures from growth range of 14%-16.5% to 17%- 18%. However, due to the stronger dollar and higher costs, full year gross margin is expected to range between 69%- 69.5% from previous guidance of 69%- 70.5%. Robotics surgery is still a potential investment for hospitals and their other customers.

Aristocrat’s share price jumped by 12% during the month as it benefitted from the stronger dollar. Aristocrat is an Australian company which manufactures slot machines; and offers different gaming products and services such as casino management systems and mobile games. The company has c.20 million monthly active users for its digital games which results in recurring revenue, and they are planning to expand their real money gaming market. Aristocrat has consistently invested more into Research & Development (R&D) than some of its peers, at around c.11.5% of R&D relative to sales since 2015. This is important as there’s generally a relationship between R&D spending and market share maintenance and/or growth. The company also has a multi-year agreement with the National Football League (NFL) to manufacture NFL-themed slot machines and license for virtual sports games. The themed slot machines will be launched in 2023 during the NFL season and this opportunity is expected to reach millions of fans, increasing monetization for the company.

With the Fed increasing rates, it’s been expected that companies’ earnings will start to be negatively impacted and this has been evident in the Q3 earnings growth numbers for the S&P 500 Index. Earnings growth in Q3 is c.2.3% y/y and has been declining for the past few quarters; while revenue growth has also come off but has held up relatively better with growth at 8.8% y/y which has helped to offset margin weakness. So far, S&P 500 sales have surprised above expectations by 2.6% and earnings have surprised on the upside by 2.94%. Furthermore, there’s also been a decline in the number of companies who provided guidance for the next quarter probably due to the macroeconomic uncertainty they are experiencing.

Overall, Q3 earnings results have been better than expected which allowed for October to recover from September’s fall. Perhaps sentiments for earnings were more negative than needed before companies report back. We’ll be watching for key economic data points to increase market allocation even more but for now, we are comfortable with the asset allocation of the fund.