Global Fund Update – November 2024

As anticipated, October was a more volatile month for global equities as the uncertainty surrounding the US election drew ever closer. The Vermeer Global Fund was slightly lower in October and is up 13.6% year to date.

October saw the approach of the US presidential election with betting odds during the month indicating a return to power for former President Trump along with the possibility of a Republican sweep while polling had the race broadly a 50/50 split. While we had thought that the election was set to be too close to call and the result might not be known for weeks, President Trump is set to return as President with a very strong performance across the country from the Republican party. We will have to wait and see the what the outcome is in the House of Representatives which is crucial regarding the path of fiscal policy.

Given the uncertainty over the election in October, we had not positioned the portfolio based on which candidate might win, but we do note that US bond yields have moved materially higher in the weeks that followed the first 50 basis point cut in US interest rates. We believe this is understandable given that both candidates intend to further expand the fiscal deficit, which is already running at 6.1% of GDP.

Economic growth in the US is materially outperforming other economies, notably China, which appears to have materially deteriorated in the third quarter. This is now leading to a substantial policy response to stabilise both the property and stock market and to try and stimulate consumer spending to achieve their 5% GDP growth target. We have been very cautious about the prospects for China in recent times but in anticipation of the possibility of a massive stimulus programme we have started to add to Chinese related exposure and have bought new positions in China Life Insurance and French based cosmetics company L’Oréal. L’Oréal shares have performed poorly this year and has long been a franchise we have admired and is now trading at a lower valuation that it has been for a considerable period of time.

The current results season has been mixed and while many of our companies have continued to produce results that were highly satisfactory, there have been some very painful falls in stocks that have missed expectations. ASML, Campari and Philips which represent just under 4% of the portfolio all suffered double digit declines following profit warnings and have all been placed under review.

ASML has been an excellent investment since we first added it to the portfolio back in 2020 but declined 16.5% in October having warned that their order book for 2025 has slowed as major customers have pushed out their investment plans combined with a normalisation of their business in China, which has been growing strongly in recent years as ASML worked down its large backlog. ASML now believes that revenue will be at the lower end of its $30-$40billion guide. The company has another investor day scheduled for this month, at which it is due to give updated guidance through to 2030 and this will be important to regain investor confidence.

Davide Campari warned that the spirits industry has slowed materially and although they are outperforming peers in their categories, this has led to a significant downgrade to earnings expectations. Campari is also going through a period of management uncertainty following the surprise resignation of recently appointed CEO Matteo Fantacchiotti after less than six months in the role. However, the majority owner of Campari has announced that it intends to purchase €100million worth of shares in the business, highlighting what it sees as an opportunity to take advantage of short term weakness. Campari shares fell 18.7% in October and are down 40% year to date.

Philips downgraded its full year revenue guidance at its results in October due to substantial weakness in its Chinese business. Having performed well in 2024, this is a real setback for the company, where new management had worked hard to re-establish its credibility after several difficult years. Philips shares fell 18% in October but remain 19% higher year to date.

Shares in Netflix have performed very well this year and gained strongly in October, rising 6.6%, after delivering another set of excellent quarterly earnings. We have been adding to our position in the stock this year and the results highlighted the company’s improving cash flow returns and it also issued revenue guidance for 2025 of at least $44billion, which would be growth of over 10%.

In Japan, Keyence delivered an excellent set of results given the challenging macro-economic backdrop. Results showed a double digit increase in operating profits with margins rising to an impressive 52.5%. In addition, Keyence increased its dividend by 17% and while this is from a very low base, it does illustrate the confidence management has in its business model and there would be considerable scope to accelerate these returns to shareholders if management chose to do so as they still have close to 20% of their market capitalisation in cash. Keyence shares have risen 12.9% this year in local currency and we believe it will be a beneficiary of improving capital expenditure in factory automation in both China and the US in 2025.

In the UK, Unilever produced another encouraging set of results that showed revenue growth of 4.5% with a balance between price and volume and guided for continuing margin improvement, pushing the shares higher. Our confidence in the improvement of Unilever’s turnaround after many years of underperformance is increasing as the company’s so called “Power Brands” continue to grow strongly. Management is also committed to disposing of a tail of underperforming assets to increase the focus of the business and enable them to either acquire new, faster growing companies and/or return more cash to shareholders.

Schneider Electric issued a positive trading update at the end of the month showing total revenue growth of 8%. Although its automation related business has been weaker, the crucial Energy Management division continues to grow at over 12%. Electrification is a key driver of the energy transition theme, which we believe will be crucial to economic development in the future. In addition, the major hyperscalers, Alphabet, Amazon and Microsoft have all announced that they plan to use nuclear energy to help satisfy their increasing power requirements due to AI data centres. We have direct exposure to nuclear power through uranium miner Cameco and through Rolls Royce, which is developing small modular reactor technology, which potentially could be an exciting additional profit generator for the business in the future.

We currently have around 8% cash in the Global Fund and anticipate that we may continue to see a short term period of increased volatility. Last month we noted that we have a full complement of 60 names in the portfolio and as mentioned earlier, we have placed several companies under review following their recent underperformance.

 

Tim Gregory
Fund Manager
Goshawk Asset Management

 

Data source: Goshawk Asset Management, Bloomberg

 

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