Fund Commentary - Allianz Global Agricultural Trends
Investment Objective
The Fund aims at long-term capital growth by investing in global equity markets with a focus on companies that are active in the areas of basic resources, raw materials, product processing, distribution, and if necessary, in other businesses with a focus or exposure relating to the aforementioned area.
What Happened in January
Global equities started the year strongly, boosted by growing demand for risk assets. Emerging market equities rallied the most, followed by US stocks. In contrast, UK equities retreated modestly, hindered by a rally in sterling and uncertainty over Brexit. In terms of sectors, information technology and consumer discretionary extended their advance. In contrast, defensive and higher yielding sectors, such as consumer staples, real estate, telecoms, and utilities, retreated, undermined by rising bond yields. Emerging market sentiment was boosted by a weak US dollar and optimism over the strength of the global economy, which closed 2017 in robust health. The US economy expanded at an annualized pace of 2.6% in the last three months of the year, while euro-zone and UK growth accelerated by 0.6% and 0.5%, respectively, over the final quarter. Agricultural stocks, as measured by the custom benchmark for the Fund, underperformed world equities, returning 2.49% in the month versus the MSCI All Country World Index at 5.64%.
The price of near-term contracts for corn, soybeans, and wheat increased 3.1%, 4.6%, and 5.8%, respectively. Crop prices for all three increased despite a greater than expected corn yield and an increase in estimated ending stocks in the January United States Department of Agriculture (USDA) World Agricultural Supply and Demand Estimates (WASDE) report. Dryer weather in Argentina has caused lower expectations for the soybean crop there, and they have contributed to higher crop prices going into February. We continue to monitor growing conditions in South America.
The Fund underperformed the custom benchmark by 81 basis points (bps) and underperforming the MSCI All Country World Index by 396 bps. Relative underperformance versus the custom benchmark was driven largely by stock selection in the consumer staples sector, offset by stock selection in the industrials sector.
Market Outlook and Strategy
Our upstream/downstream positioning at the end of January was ~51%/49%, excluding cash. Our upstream exposure includes companies that are involved in recent merger and acquisition events as well as agricultural equipment and agricultural chemicals. We continue to favour downstream players who should benefit from lower agricultural commodity input costs and a more abundant crop after the completion of the US harvest for corn and soybeans. We also expect animal health to become more of a focus as livestock herds expand over the next two to three years. We are closely monitoring growing conditions for corn and soybeans in South America. Brazil’s growing season follows last year’s harvest for corn and soybeans of a 47% and 18% increase, respectively, from 2016’s crop shortfall. Argentina’s growing season follows last year’s harvest for corn of a 39% increase from 2016 due to the elimination of export tariffs.