Nick Griffin
“Global equity markets made a solid start to the year in Q1 2023, following a particularly tough year in 2022. Having recognised we were in a bear market early in January 2022, the Fund has been focused for some time now on three things to become more constructive on equity markets:
1. Long-term interest rates to peak;
2. Earnings estimates to come down; and
3. Time.
“Coming into 2023, we felt confident that two of these three factors had been met, with long term interest rates peaking last October and the bear market passing one year in duration in January. As the quarter has progressed, our confidence has increased.
“While market participants still hang on every inflation print and Fed meeting, it’s important to note that the recent banking woes in the US are basically doing the Fed’s job for them, and the resulting tightening in lending standards means the inflation battle should soon be over. With this tightening cycle nearing its end, we essentially have one more macro concern to worry about before normal service resumes and that is the age-old question: are we going to have a ‘hard’ or ‘soft’ economic landing as inflation comes down?
“Here we see two possible outcomes. The global economy could muddle through this challenging environment supported by the China reopening, the energy transition spend, and the reshoring dynamic. Alternatively, the economy could enter a traditional recession whereby housing weakens, personal finance dries up and financial institutions get into difficulty via poor lending and balance sheet practices. Interestingly during Q1, the market started by believing in the ‘soft’ outcome and ended worrying about the ‘hard’.
“We are somewhat indifferent as to the outcome. With long term rates peaking, many of our holdings have returned to doing what they should be doing – following their long-term earnings prospects. The pressure from rising long term interest rates has been relieved, and hence valuation multiples have stabilised.
“We now see many instances where market participants can look through the valley and see earnings prospects improving and rewarding stocks accordingly. In our High-Performance Compute Area of Interest (AoI), the launch of ChatGPT and Microsoft’s adoption of generative AI across its product suite has seen accelerating demand for high performance semiconductors, ultimately benefiting our key holdings in this space and allowing investors to look through the economic malaise to improved future earnings, with their stock prices responding accordingly.
“Elsewhere, the reopening of the Chinese economy is likely to see a wave of Chinese travellers returning, with luxury goods spending likely to benefit. Again, our Emerging Consumer holdings are seeing improving earnings prospects despite the economic slowdown, and stock prices are responding accordingly. This is indeed welcome news. While starting the year somewhat conservatively positioned, we have increased the Fund’s holdings in both these specific areas as this news developed over the quarter and see this as a good sign that this bear market is nearing an end.
“While there is no doubt there are a few bumps to come, we eventually expect earnings estimates for the whole market to bottom at some point and expect other AoIs to exhibit similar earnings acceleration and stock performance as market participants eventually look through the valley to the other side of this difficult period.”
By Nick Griffin, CIO
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