Global Fund Update – September 2024
Despite an astonishing level of volatility in world stock markets, the Vermeer Global Fund ended August slightly higher in Sterling terms as the US Dollar weakened against most major global currencies and represents around 50% of the portfolio.
August began with a period of material weakness in equities caused by the collision of a rise in Japanese interest rates and a notably weak US employment report. This sparked an unwind of the Yen carry trade that has been so successful for many years. Japanese equities fell sharply with the Nikkei declining nearly 20% in the first three trading sessions. The largest declines were seen in the financial sector, supposedly the main beneficiary of the rise in Japanese rates, highlighting that the move was sparked by excessive positioning rather than real fundamentals.
Global central banks moved quickly to soothe markets with comments that there was no requirement for an emergency rate cut in the US, which we strongly believe would have made the situation worse, and also the Bank of Japan Deputy Governor noting that there would be no further upward moves in Japanese rates while conditions remained volatile. Subsequently, Japanese stocks rallied strongly and ended the month down only 1.1%, with the US market closing higher in local currency.
The Federal Reserve are clearly on course to cut interest rates at its September meeting and the only debate now is by how much. More importantly, interest rate futures are predicting around nine rate cuts between now and the end of 2025. Whether this turns out to be correct or not remains to be seen but the direction of travel for US rates is clearly lower. At the annual Jackson Hole Symposium, Fed Chairman Jerome Powell made is clear that with inflation now under control and unemployment beginning to rise more markedly, the time was now right to ease policy.
In China, the economy continues to be weak and GDP forecasts for 2024 and 2025 continue to trend lower. There are increasing calls for the Chinese authorities to increase their budget deficit to reignite growth and help stimulate a recovery in the property market. Luxury goods stocks have broadly struggled this year as Chinese consumer confidence remains weak and we continue to maintain only a modest exposure to this area via Moncler, which is executing very well. We also hold a very small position in Shiseido, which has really struggled but we believe offers recovery potential, especially if the Chinese government did decide to increase deficit spending in an attempt to stimulate better growth.
We broadly maintained our cash weighting over the month but did introduce two new positions to the portfolio. Artificial intelligence has been a dominant market theme this year and we are beginning to think about which companies will be the next beneficiaries of the wave of spending that is trying to capture this huge opportunity. One area we think could be a clear winner from this opportunity is companies that own proprietary data that sits behind a pay wall. We started a new position in Wolters Kluwer after we met with the company in early August. Wolters Kluwer is a Dutch based business that is a global leader in the provision of information services. The company has very strong positions in healthcare, tax and various financial services markets and has the opportunity to be a longer term winner from the quality of the data it produces for the industries it operates in. This will be aided by the integration of generative AI tools across all their divisions. Wolters Kluwer recently produced results that showed organic growth of 6% with digital and service subscriptions up 8% as full year guidance was left unchanged. The company should continue to show high levels of consistency with solid margins, free cash flow and a strong balance sheet, creating scope to continue to grow the dividend and buy back shares.
We also re-introduced a position in Philips, which we sold some time ago after problems with its sleep division led to a long period of underperformance. New management is refocussing the business to become a purer healthcare play, focussing on Diagnostic Imaging, Ultrasound, Image Guided Therapy and Connected Care, which accounts for 80% of sales with Personal Health representing the remaining 20%. We believe new management has the scope to take advantage of structurally growing markets and significantly improve margins and returns to shareholders. Recent results highlighted the progress they are making to accelerate growth in areas where they are market leaders and the opportunity to focus on fewer projects and greater levels of innovation. We anticipate further progress will be highlighted at the company’s “Show & Tell” meeting later this month. We expect management to remain conservative after a difficult period but we also anticipate that revenue growth and margins should improve as the company strengthens its positions, particularly in the fast growing area of connected care. Shares in Philips understandably sit at a big discount to competitors in the medical technology sector, but we believe a period of solid results should help close this gap over time. During August, we added to other health care positions including Thermo Fisher, a recent entry into the portfolio, and Carl Zeiss Meditech following a positive meeting with the company.
Nvidia produced another excellent set of results, but the share price fell back modestly after a very strong recovery during August when the share price briefly fell back below $100. CEO Jesen Huang once again highlighted the strength of demand for GPU chips driven by huge investments from the hyperscalers and sovereign countries. While we have reduced our position twice this year, Nvidia remains one of our largest absolute positions although neutral in relative terms. We believe the company has a strong technology lead over its rivals and that although the path ahead may be a little choppier than over the last two years there is still ample scope to grow revenues and profits that can justify a valuation in excess of $3trillion.
Burlington Stores produced another solid set of results that showed 5% comparable sales growth from a year ago. Burlington shares have recovered strongly in the last year, doubling off their lows and now sell for an optically high price to earnings multiple. However we believe this is justified by expectations of higher levels of revenue growth and a material increase in store count from the current base of around 1,000 stores to 2,000 over the medium term.
Like other “off price” retailers, including the superbly managed TJX, the recent results season highlighted the US consumer trading down as the impact of higher interest rates continues to be felt. The results season for US consumer stocks was generally mixed and showed the impact of rising unemployment as well as higher rates but good quality franchises showed strong execution, enabling them to produce results that pleased the market.
September is seasonally a more difficult month for equities and with the uncertainty of the upcoming US election in November just around the corner, we are happy to have cash on hand to look for opportunities to invest in our existing portfolio along with new ideas. Equities have performed very well this year as expectations of lower rates and a soft landing for the US economy have driven valuations higher and the Vermeer Global Fund ended August up 14.4% for the year.
Tim Gregory
Senior Fund Manager
Vermeer Investment Management