Market Backdrop
Global equity markets gave up some of their gains during the quarter as concerns over a global economic slowdown and trade disputes remained elevated. The Trump administration announced additional tariffs on a final list of consumer goods early in the quarter as negotiations with the Chinese appeared to stall, only to reverse course a few weeks later on renewed negotiations momentum. U.S.-China trade negotiators are hard at work with important talks in October as tariffs have been delayed until December on certain goods and as China has shown willingness to start buying some agricultural goods from the U.S. once again. The stop-start uncertainty of trade relations with the U.S. is likely to keep markets on edge.
Central banks are beginning to put most of their chips on the table as the global economy slows, and inflation remains under control. With major central banks such as the Federal Reserve and the European Central Bank on a monetary policy easing path, many advanced economy and emerging economy central banks have cut rates or announced further stimulus measures in the past quarter. Central banks easing and interest rate declines are positive for global growth in the next 6-12 months. The added stimulus led to plunging bond yields across the globe with pronounced falls in Europe and the U.S. European yields were led down by German yields which reached a point in the quarter where the whole German yield curve sat at negative yields. Estimates suggest that 20% of the global economy has negative 10-year bond yields with more than $15 trillion of global bonds trading in negative yield territory while 25% of the world’s central banks have negative policy rates. This led to bonds outgaining equities in the quarter in most regions.
MSCI EAFE large caps underperformed small and mid-caps for the quarter while Growth outperformed Value for the quarter and year-to-date periods. The best performing MSCI EAFE countries for the quarter were Belgium, Japan, and the Netherlands while the worst performing for the quarter were Hong Kong, Singapore, and Sweden. The best performing emerging markets for the quarter were Turkey, Egypt, and Taiwan while the worst for the quarter were Argentina, South Africa, and Poland.
Performance and Attribution
The Timothy Plan International Fund gave up a little of its outperformance versus the benchmark MSCI EAF index during the quarter mainly form stock selection in the Health Care sector. Poor performance from Fresenius Medical Care on regulatory concerns as well as Ipsen SA on competition concerns. The Fund had very good stock selection in the Consumer Discretionary and Financials sectors for the quarter. From a country standpoint, allocation was hampered by an underweight to Japan as Japan outperformed for the quarter and an overweight to Hong Kong where protests in the country led to subdued equity returns there.
Outlook
Uncertainty over the path of global growth, monetary policy, Brexit, and trade disputes is likely to lead to jittery markets in the near term. Sharp rotations in style drifts could also lead to some short-term momentum shifts. In spite of this, we remain focused on finding sustainable businesses with structural advantages that can compile wealth for shareholders. Short term volatility can lead to challenges but also opportunities for the Fund.
Large/Mid Cap Value 3Q19
Third Quarter 2019
Market Commentary:
Looking back, equity markets ended the quarter in positive territory despite continued concerns over the ongoing trade dispute and future economic growth given the deterioration of economic data. The U.S. market outperformed international equities and large caps fared far better than small caps. Investors continue to look for additional clues regarding the health of the economy given the longevity of the business cycle. The Federal Reserve cut rates twice during the quarter, marking the first time for such actions in over a decade. The market remains optimistic regarding additional future rate cuts in order to help bolster the economy. Interest rates fell sharply during the quarter, notably the yield on the 10-year U.S. treasury declined to 1.66%, falling 34 basis points over increasing demand for safe-haven assets amidst the uncertainty. The impact from macroeconomic uncertainty is clearly weighing on business confidence as company fundamentals have so far remained relatively resilient, while supporting the belief that earnings will be up year-over-year in 2019.
Looking forward to the end of the year and into 2020, earnings growth remains a key question for investors as earnings for the upcoming third quarter are once again slated to fall year-over-year. The prior two quarters saw positive surprises, relative to estimates, push growth back into positive territory but looking ahead, the market is still forecasting another year of strong growth into 2020. In contrast, the most recent GDP reading was for 2%, decelerating from the prior quarter, and other indicators such as the ISM’s PMI for manufacturing fell even farther into contractionary territory for the first time in nearly a decade. These, along with the trade disputes, continue to weigh on business confidence and have started to have some modest impact on consumer confidence as well. As the economic cycle continues to progress into its latter stages, the preference for high-quality, stable, and cash generative businesses are likely to increase even more so as markets become increasingly concerned for those companies with more challenged models. These differences, we believe, will cause further dispersion in returns between those companies best able to weather these uncertainties versus those who are not. We remain vigilant in assessing absolute risk in the securities we invest in and striving to protect client capital during these times for potential volatility from the uncertainty.
Timothy Plan Large/Mid Cap Value Fund Q3 2019 Commentary
Index Drivers:
Within the S&P 500 Index, Utilities and Real Estate posted the strongest returns during the third quarter while Energy and Health Care both posted declines.
Performance Drivers:
Positive stock selection in Consumer Discretionary and Materials helped relative performance. KLA Corp. hosted a favorable analyst day, pointing to accelerating near-term results as semiconductor capital equipment trends improve while increasing their long-term operating model. Sherwin-Williams beat earnings with strong margin performance in their consumer brands segment as the integration of Valspar continued. Dollar General posted strong results as strong execution and cost containment helped bolster margins and management reiterated their mutli-year growth strategy. CMS Energy rallied as interest rates declined and investors looked towards their upcoming investment plan as a catalyst for future earnings growth. Everest Re Group shares moved higher as industry reports point to large pricing increases for mid-year reinsurance renewals.
Unfavorable selection in Health Care and Energy weighed on relative performance. Crude price fluctuations amidst concerns over excess supply as demand growth wanes impacted several stocks including EOG Resources. Arista Networks fell as decelerating spending on technology in the near-term pressured shares, despite the attractive long-term growth potential. Patterson Companies shares moved down as the company continues to work through headwinds in their dental business though sales and earnings both were up in their latest quarterly report. PerkinElmer declined after sales fell modestly below expectations due to weakness in their industrial sales into China. DENTSPLY SIRONA continued to face broader headwinds in the dental market that pressured shares, as management continued to execute on their plan for growth initiatives and cost containment.
Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting info@westwoodgroup.com. Benchmark Data Source: © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.