World View

Vermeer Monthly – July 2024

3rd July 2024

Global equities enjoyed very strong performance in the first half of 2024. The Vermeer Global Fund rose by 15.3% compared to the IA Global Sector which increased 8.6%. Returns over the first half for the Fund were aided by strong performance from a number of our larger positions and thematic ideas.

Nvidia, which represents around 5% of our portfolio, rose by around 150% over the first six months as the principal market beneficiary of the boom in demand for GPU chips for artificial intelligence data centres.

Shares in Microsoft, which is the largest position in the portfolio, rose by 19% as it continued to deliver strong results and benefits from the growing use of AI. Oracle, the third largest position in the Fund, rose by over 30% as its cloud infrastructure business grew strongly and management gave confident guidance about accelerating future growth rates.

Our positions in Eli Lilly and Novo Nordisk, the two major GLP1 franchises, also had a very strong start to the year. Performance in this space has been aided by expectations that these drugs can also be used to treat additional therapeutic areas related to obesity, such as sleep apnea and cardiovascular disease.

Schneider Electric rose by around 25% in the first half and performed strongly on the back of significantly elevated expectations related to electricity demand growth for data centres. This is on top of the growth that was already forecast for its role in the energy transition which is providing a major tailwind for companies in this sector. Nuclear power stocks have also seen strength so far this year and the stock that we hold in the space, Cameco, performed well rising by around 14% despite falling 11% in June.

There were also a number of detractors to performance, not least the continued weakness of the Japanese yen, which weakened by another 13% over the first half of the year against Sterling. This negatively impacted the performance of our Japanese equity portfolio which saw decent performance from stocks like Keyence, Shimano and Toyota Motor in local currency.

Carl Zeiss Meditec declined over 30% following two profit warnings. At this stage, we are sticking with our position in the stock as we believe this high quality franchise is close to bottoming out in both its important US and Chinese markets, which should set up a materially better outlook for the company in 2025 and beyond.

We introduced a number of new positions to the portfolio over the first half, including music streaming company Spotify, medical equipment and life sciences company Thermo Fisher and Japanese silicon manufacturer Shin-Etsu Chemical. We also made a number of disposals including Apple and Nike earlier in the year. We sold Apple on valuation grounds while Nike was sold following disappointing quarterly results, which were subsequently followed by a major profit warning at the end of June as shares fell to their lowest levels since early 2020.

At the end of 2023 equities had performed strongly on the back of anticipated US interest rate cuts that were fuelled by dovish remarks from Fed Chair Jerome Powell at the final FOMC meeting of the year in December. Markets quickly moved to price in as many as six rate cuts, and none have as yet materialised. However, global stocks have managed to ignore this disappointment as the US economy has proved more resilient than expected and full year GDP growth is forecast to be around 2.5%. Expectations are still that there may be two rate cuts in late 2024 and we do see some signs from more recent economic data that the US economy has cooled, and consumer spending is weakening.

In Europe, the surprise decision by French President Macron to call early elections was very unhelpful to sentiment at the end of June. French government bonds fell sharply, and the local equity market declined over 6% in June alone as markets worried about both a potential right or left wing parliament. Shares in Orange were the worst impacted in our portfolio and while the business does have considerable exposure to the French domestic market, the company is also exposed to other parts of Europe and the African market. Recent results from Orange were solid, but the share price has been impacted by concerns over a new price war in its local market and as a result, our position is under review. Schneider Electric is a superbly managed global business and pharmaceutical company Sanofi is also a highly diversified company, and we believe that the recent success of its drug Dupixent and the upcoming sale or spin-off of its consumer health franchise is not being appropriately reflected in its valuation.

In the UK, the calling of a snap election has caused little or no disruption in financial markets. We are pleased with the first half performance of most of our UK based companies, notably Cranswick and Oxford Instruments in the small cap space. Both companies produced good results and have seen their share prices re-valued to what we consider more appropriate levels. Unilever is beginning to show signs of benefitting from the combination of new management and an activist investor and still sells for an attractive valuation and has strong dividend yield support.

In Japan the continued weakness of the Yen dampened good performance from the Nikkei index. However, the ongoing theme of improved corporate governance and returns to shareholders, which seems to us to be increasing in traction alongside shareholder activism, remains a clear positive for future returns. Sony did not perform particularly well in the first half, rising by 2% in local currency, but it seems to us an obvious candidate for activism. Dan Loeb’s Third Point hedge fund agitated for change back in 2019 which for a while led to improved performance which has not been sustained since he exited his position. We believe Sony is trading at a material discount to the sum of its parts and could increase its dividend or buy back shares to help reduce this discount.

The Chinese economy continues to struggle to recover from the property slump that has materially dented consumer confidence despite some policy measures to increase economic activity. This has impacted a number of our companies, especially in the health care sector where, as already noted, Carl Zeiss Meditec has suffered two profit warnings. Danaher, which we have held for many years, expressed confidence that its biologics business would improve towards the end of the year as China bottoms out and the impact of the Inflation Reduction Act on drug development will also start to reduce.

We have used this sector weakness to introduce Thermo Fisher Scientific as a new position in the portfolio, a business we have long admired but never previously owned. We think Thermo, like Danaher, is superbly managed, has a great track record on acquisitions and that current weakness is a great opportunity to accumulate shares as they head into what we believe will be a stronger 2025/26.

Our portfolio has significant exposure to the increasingly important theme of artificial intelligence. As well as Microsoft, Nvidia and Oracle, we see Accenture, Amazon, Alphabet, ASML, IBM and Varonis Systems as other names in our portfolio that will be beneficiaries of increasing demand for AI related products and services. We did reduce our position in Accenture earlier this year after a strong rally in the shares that we felt overstretched the valuation of the stock and that the company would not be able to show at this stage, enough benefit from AI to offset weakness in its general consulting business. The stock subsequently travelled poorly into its June results and shares have now stabilised around $300, which we see as a far more attractive level and will be considering adding back to our position in the coming weeks.

Our new position in Shin-Etsu Chemical reflects our desire to increase our exposure to the semiconductor space without buying something that has been totally correlated to the exponential rise in stocks like Nvidia. Shin-Etsu is a Japanese business which has world leading technology in the production of semiconductor silicon and photomasks so effectively is a key part of the supply chain for the industry hiding inside a chemical company. This inevitably impacts the rating the stock trades on but as we see increased demand for powerful chips, we expect Shin-Etsu to be a structural winner and distract attention away from the lowlier rated and lower returning more cyclical parts of the business, including the manufacturing of PVC.

In the first half of 2024 we reduced our position in Nvidia on two occasions to manage portfolio risk as the stock price rose exponentially and valuation has increased significantly as its market capitalisation crossed $3trillion and was briefly the world’s largest quoted company. For a number of years, we have been great believers in the technological leadership the company has shown in the chip industry and also recently in networking. However, it is very difficult to calculate where a cyclical peak in demand may occur and for that reason, we are looking at paring back our position into further strength.

We have increased our cash weighting in the portfolio to around 9%, which reflects a slightly more cautious view of the market, notably in the US after such a strong run. However, we do still see a number of attractive opportunities in new and existing ideas as the rise in the market has been very narrow recently and many stocks are actually down over the first half, despite global equity markets rising over 12%.

Tim Gregory
Senior Fund Manager
Vermeer Investment Management