World View

Vermeer Monthly – April 2024

5th April 2024

March was another positive month for global equities, rounding out a very strong quarter for world stock markets. The Vermeer Global Fund rose 3.5% in March, taking year to date gains to 12.9% compared to the 10% return for the global equity market.

US economic performance in 2024 has continued to be more robust than had been anticipated by many commentators. After numerous upward revisions, 2023 GDP growth came in at 2.5% and the first quarter of 2024 is currently expected to see growth of around 2%. As a result, US interest rate cut expectations have considerably eased over the last three months. At the final Federal Reserve meeting of 2023, Chairman Jerome Powell appeared to clear the path for a series of rate cuts that were supported by the Fed’s “Summary of Economic Projections” which suggested that there would be three rate cuts in 2024 followed by another three cuts in 2025. Following those comments from Powell in December, interest rate futures moved immediately to price in as many as 6 cuts in 2024 but the fact is that the Fed remains data dependent and while growth is solid, employment strong and inflation proving potentially somewhat stickier having fallen quickly to a headline CPI rate of 3.2% in February, the scope for aggressive rate cuts is limited.

Although expectations of sizeable interest rate cuts drove stocks higher in early 2024, equity markets have not been negatively impacted by this shift in rate expectations thus far this year. A more resilient economy has helped deliver better than expected earnings growth. Although it is easy to point to the power of the booming AI trade for this performance and the incredible strength of shares like Nvidia, which is up an astonishing 82% year to date, the reality is somewhat different. Looking at our own portfolio, there has been a far broader spectrum of success in the first quarter, with strong performances from Carl Zeiss Meditec, Disney, Oracle, Burlington Stores and notably Toyota Motor, all from different sectors and contributing to a positive start to the year.

Oracle shares have rebounded strongly after a poor finish to 2023. Recent quarterly results were solid and very strong future bookings suggest that the company continues to be unable to fulfil very strong demand for which it continues to build out its data centre capacity. On the earnings conference call, founder Larry Ellison talked optimistically about the enormous opportunity in healthcare data following the acquisition of Cerner in 2022, albeit this had impeded growth in the short-term as the deal is fully integrated into the company.

Shares in Burlington Stores, the US off-price retailer, performed strongly in the first quarter, rising by 19% and provided a solid quarterly earnings report in March to end its fiscal year. The company should be well set in 2024 and beyond as it continues with its plan to more than double its store count to 2,000 stores over the long term. Along with this, the company recently announced targets to grow revenues to $16billion over the next five years with an operating margin of 10% leading to a tripling of operating income after reporting just under $10billion of sales last year. Although the stock has virtually doubled from its 2023 lows, if the company can achieve these targets, there remains a very positive runway for the stock over the longer term.

Accenture shares are virtually unchanged this year after the stock fell back around 10% following its results that could not meet lofty AI expectations. We trimmed our position at around $378 into results, fearing there was little that the company could say in the short term that would justify the move in the stock price since May of last year, rising 44% with little change to earnings expectations. Although AI related revenue is growing strongly, the traditional core consulting business is being held back by economic headwinds that are still hindering the spending of small and medium-sized businesses. We strongly believe that Accenture is extremely well placed to benefit from the increased adoption of AI by many companies and are looking for an opportunity to add back to our position in the future.

After a long period of very poor performance, we have added to our holding in Shimano, the Japanese manufacturer of bicycle and fishing components. After a COVID inspired boom, the cycling industry has been going through a long and painful inventory readjustment, which we believe will end in 2024. Investors rarely focus on the company’s world leading position in the fishing industry, but the reality is that this is also a very valuable asset from which the company generates very good returns.

Shimano management has the opportunity to return a considerable amount of capital to shareholders as it has over 20% of its current market capitalisation in cash and this is leading to management facing increasing investor pressure to be more shareholder friendly.

Shareholder activism continues to be a critical theme for the further strength of Japanese equities, which finally broke into new all-time high territory late in the first quarter, with the Nikkei having seen its previous peak as long ago as 1989. Although the Bank of Japan did move to end its zero-interest rate policy in March, it continues to take very small steps on the long road to monetary policy normalisation. As a result, the Yen continues to be very weak and remains a hinderance to fund performance.

Following Davide Campari’s full year results at the end of February, we had the opportunity to meet new CEO Matteo Fantacchioti in March, who takes over from the very well-respected CEO Bob Kunze-Concewitz after his retirement in April. Fantacchioti has over 20 years’ experience in the beverage industry and is an internal hire having previously run the company’s business in Asia, a key area of growth both for the newly entered cognac market and the business as a whole. We do not believe that there will be any change in a focus on the long term for the company following the management transition, with Fantacchioti’s main priority being the successful integration of the recent Courvoisier deal and finding the correct people who can help build the brand back to where Campari believes it should be. Campari remains exposed to the most attractive areas of the global spirits market, such as bourbon, tequila and aperitifs, which all have strong long term growth runways albeit are seeing growth return to more normalised levels after a very strong few years. We remain confident that Campari can continue to outperform the sector and that new management will remain focused on the long-term opportunity.

We are pleased to report a solid start to the year but are very mindful of the challenges that lie ahead. Given the strength of performance in Nvidia, we have trimmed the position back to 4.1% from its peak of around 5.5% earlier in the month.

We are still running broadly fully invested with a month end cash position of around 2.5% but do sense that the market may continue to broaden out and are looking at overall portfolio construction in that context. While we remain cautiously optimistic about the prospects for global equities, we will be using the upcoming results season as a barometer for both our existing positions and a number of stocks that currently sit on our watch list.

Tim Gregory
Senior Fund Manager
Vermeer Investment Management