What we watched last month
In February, US, European and Japanese stocks hit new all-time highs. At the same time, ‘extreme greed’ returned to the stock markets, and money market fund assets reached $6 trillion for the first time. Chinese stocks have fallen to a Price Earnings Ratio of just 8, which is the lowest valuation in a decade, and Consumer Prices dropped at the fastest pace since 2009. Nevertheless, Chinese stocks managed to fully recover from all year-to-date losses. The average price of a used Tesla has declined 18 months in a row and fell from a record high of $67900 in July 2022 to a record low of below $35000. European gas prices fell to pre-energy crisis levels, Japanese stocks hit a 34-year high, Cocoa traded on a new 46-year high, and Bitcoin soared above $60000. On the last day of the month, BlackRock received a record $612 million into its Bitcoin ETF and crossed $10 billion assets under management. US-Treasury yields rose across the curve after hotter than expected Consumer Prices, Jobless Claims and Producer Prices. As a result of that, markets were pricing in three interest rate cuts for 2024, well below expectations a few weeks ago. Last month I highlighted that to me it has proved useful to keep an eye on the inflation rates as calculated by ‘Truflation’, and as per 23 February 2024, the US inflation rate is seen at 1.71%, well below the rate reported by the US government.
Another interesting fact I read was that since December 2019, the Magnificent 7 stocks collectively delivered a 28% annualized return. Of this, circa 27% was attributable to earnings growth (21% sales growth with 6% margin expansion), with only 1% due to multiple expansion. And on a Price-to-Earnings-to-Growth (PEG) ratio, the valuations of the Magnificent 7 are still significantly lower than the rest of the S&P500.
Nevertheless, going forward it is worth remembering that seasonal patterns of volatility in the S&P 500 show that in the last 20 years, the highest volatility levels of the year are usually reached in mid-March (while lowest levels are usually seen in January and July).
What happened in the fund last month
Ferrari
Among other things, Ferrari reported another record year. It is very impressive to see that a 3% increase in unit shipments can result in a revenue increase of 17% and an increase of earnings per share of 36%. One of the drivers for this impressive development is the strong increase in ‘personalizations’, which is probably understandable. When someone spends that much money for a car, he or she probably does not mind spending some extra money to make the car unique. It is worth mentioning that the order book now covers the entire year 2025. It is not surprising that most bank analysts covering the stock only recommend to ‘hold’ the stock, as the valuation is not (and has never been) ‘cheap’. In an imaginative rational world ruled by analysts, in which ‘cheap’ and ‘value’ are the main criteria for buying goods, Ferrari would not be able to exist, and everybody would be driving around in Dacias, which without a doubt are better ‘value-for-money’. Everybody would be wearing ‘Primark’ clothes and flying with Easyjet or Ryanair (or actually not fly at all, but spend holidays at home, as this is cheaper). The funny thing is though that I would be very surprised if any of those bank analysts are in fact, personally, driving a Dacia and wearing Primark clothes.
San Lorenzo
Yacht producer San Lorenzo showed some interesting data points in the release of its (record) results for 2023. Its client base, UHNWIs (Ultra High Net Worth Individuals, with a net worth above $50m), is expected to increase by 24000 people per year and will reach 385000 by 2026. The average age of its Superyacht buyers is 49 years, and the average days spent on board has doubled from 60 days to 120 days. This sounds like a rather pleasant version of ‘working-from-home’.
Schneider Electric reported record results and emphasized again the megatrends the company is benefitting from, from artificial intelligence to reshoring. The company keeps reiterating that while in 2020, 20% of the energy mix was electricity, this is expected to increase to 50% by 2050. Schneider Electric is the global market leader in electrical distribution for Data Centers & Networks, Buildings, Industry and Infrastructure, and is therefore well positioned to benefit from this development. 
Nvidia surpassed a market capitalization of $2 trillion on the back of impressive results. Revenues for the fourth quarter were up 22% sequentially and 265% year-over-year and are expected to increase by around 10% in the current quarter. CEO Jenson Huang said that Artificial Intelligence has hit the ‘tipping point’ and expects the strong trends to continue. While the stock was weak in the days before the results, it reached new all-time highs thereafter. Expectations were high and remain high, which the chart below illustrates rather nicely. AI GPUs (graphics processing units) sold into data centers are expected to reach 3m units in 2024, and 5m in 2027 (please note that the chart was made before the release).
CEO Huang gave an excellent example for the use of AI. There are hundreds of millions (or more) data points in the internet, from, for example, videos, pictures, news articles, to goods. With the help of Generative AI, a company like Meta uses ‘recommender systems’ to show its Facebook users, out of this endless pool of data, on a tiny screen of a mobile phone, in real time, exactly the content which is of interest to them. In the past, users were used to search the internet for whatever they were interested in. Nowadays, social media companies try their very best to ‘recommend’ interesting and relevant content, matching it with individual user interests, to try to keep them on their apps (or homepages) for as long as possible (and make money via advertisements, of course), and/or try to encourage users to buy certain items (and get provisions for that). Another good example for the benefit of Generative AI is American Express, which according to Mr Huang managed to improve fraud detection by 6%, thanks to the new technology. On a separate note, L’Oreal, which reported record results as well in February, said during the earnings call that Generative AI helped improve the productivity of its (huge) advertising spend by 10%-15%. So, while AI was just a buzz word at the beginning, many companies talk about real use cases and real benefits, and it is fair to say that we are just at the beginning.
How to invest when markets reach new highs?
The simple answer is ‘buy more’. As you may be aware, it is our firm belief that timing the market is somewhere in between ‘extremely difficult’ to ‘impossible’, and thinking about it, we are not aware of any investing legends who achieved their outperformance and reputation by timing the markets. You may have heard the sentence that ‘past returns are no guarantee for the future’, but history clearly shows that investing when markets reach new all-time highs has outperformed investing ‘on any day’, as the chart below (for the S&P 500 Index) shows.
And what about profit taking at new all-time highs? Well, as a recent study by Schroders shows, switching to cash at all-time highs in the past had been an absolute, outright disaster.
In addition to the chart above, the study states that a switch to cash after all-time highs destroyed 23% of wealth over 10 years, 33% of wealth over 20 years, 53% of wealth over 30 years and 90% of wealth since 1926!
Nobody knows what will happen tomorrow, and everything could be materially different from what we have experienced until today, but ‘buy & hold’ has clearly been the superior strategy for medium- to long-term investors. And to be honest, with a shorter-term time horizon, money should probably not be invested in equities anyway.
Last but not least, it may be of interest to learn what happened in the past when the S&P500 Index closed both January and February in positive territory. According to Carson Investment Research, this has happened 28 times since 1950. In 26 times of these 28 times, the index finished above the levels of end of February, with an average gain of 11% in the remaining 10 months.
On the day of writing this article, MW GESTION ACTIONS EUROPE holds the following quoted securities:
- Ferrari for 6.0% of its outstandings;
- L’Oreal 2.0% of its outstandings;
- Nvidia for 3.7% of its outstandings;
- San Lorenzo for 2.0 % of its outstandings;
- Schneider Electric for 2.8% of its outstanding
- The MW Actions Europe fund is a compartment of the Luxembourg SICAV MW ASSET MANAGEMENT. You should contact the fund management company MW GESTION or your financial advisor for more information.
Written on March 8th,2024
Past performance is no guarantee of future performance. The content does not constitute a recommendation or a sales proposal, nor does it encourage investment.