What happened in the markets last month
Clearly the most important event of April was the hotter-than-expected inflation in the USA, while at the same time, disappointing data regarding the growth of the economy in the first quarter of the year was published. As a result of that, interest rates rose sharply, and expectations for rate cuts in the US have now fallen from 6-7 at the beginning of the year to just 1-2. Some market participants even said that the next move could be an interest rate hike. In Europe, the European Central Bank kept rates unchanged but hinted at a rate cut in June. As a result, the volatility index VIX soared to a 6-month high while risk assets like equities suffered, especially those which had experienced strong price momentum since the beginning of the year. Cocoa, Copper and Gold hit new all-time highs during the month, and the Japanese Yen fell to the lowest level since at least 1990. Money market funds’ total assets reached new record highs. Sentiment wise it is worth noting that the CNN Fear & Greed Index has been in ‘Fear’ territory at the end of the month, for the first time since October.
What happened in the fund last month
Among others, two of our portfolio heavyweights reported results.
LVMH reported organic sales growth of just 3% in the first quarter of the year, which may look slightly underwhelming. The stock rose afterward nevertheless, as expectations had been rather muted, especially after the shocking comments of Kering in March (Q1 sales of its biggest brand, Gucci, were down nearly 20%). LVMH’s most important division, Fashion & Leather Goods, rose by 2%, while the correction in Wines & Spirits is ongoing (organic sales decline of more than 10%). During the call, the company made a few interesting comments. Firstly, it was stated that the organic increase in Q1 puts the average growth rates of the past 5 years at 10% for the group and 16% for Fashion & Leather Goods, which is more than respectable. Most of the slowdown of growth is blamed on ‘aspirational customers’. Globally, 39% of consumers fall into this category, and the definition is that these people ‘strive for more in life’. The customer group is young (43% of 16–24-year-olds are part of this audience, compared to just 23% of 55-64s), and hence the price increases of the last few years, together with high inflation, makes it more difficult for them to maintain their consumption at high levels (although LVMH expects a gradual recovery in this category going forward). On the other hand, the growth from wealthy customers is unbroken. Demand from Chinese clients grew by 10%, and especially Japan benefitted from their increased travel activity. And last but not least, ‘quiet luxury’ (defined as understated elegance, refined taste and high-quality materials) continues to do very well.
ASML, the biggest position in the fund, underperformed in April after Q1 results disappointed some market participants. Especially, order intake was well below expectations (3.6bn versus 4.6bn expected). While this obviously is not great, it is an excellent example for the increasing short-termism of market participants. People with a longer time horizon like us like to look at longer-term trends and try to put things into perspective. We remember very well the end of January, when ASML released the best order intake in the company’s history with 9.2bn, which was well above the expectations back then of 3.6bn. Therefore, it is fair to say that order intake is nearly 5bn above expectations if we put the two most recent quarters together. After Q1, some analysts may have hoped that 9bn of new orders every quarter is the new normal, while now people fear a collapse of future orders. Not surprisingly the company confirmed its outlook for 2024 and expects a clear acceleration in 2025. It is important to note that ASML has very close relationships with its customers and their long-term technological roadmaps, as ASML’s machines are the most important (and most expensive) in most semiconductor plants.
Artificial Intelligence
During the month, there were quite a few interesting comments regarding AI which are worth highlighting. Alphabet and Microsoft sent a clear message: the spending on AI and Cloud computing is paying off, which means the billions invested will continue. For Microsoft in particular, AI services contributed 7 points to the growth of its Cloud products. Quite impressively, more than 65% of the 500 biggest companies in the USA now use Microsoft’s Azure OpenAI Services, and more than 60% use Microsoft Co-Pilot for Microsoft 365. TSMC, the world’s largest semiconductor maker, has forecast that the revenue contribution from AI processors will more than double this year and account for a low-teens percentage of TSMC’s total revenue in 2024. Over the next five years, this segment is expected to grow at a 50% compound annual growth rate and increase to more than 20% of revenue by 2028. While the fund is not directly exposed to TSMC, high demand is usually followed by increasing utilization rates of the factories. Once these go well above 90%, the production capacity needs to be expanded, which will then lead to new orders for semiconductor equipment companies like the aforementioned ASML. Around 100 new semiconductor plants are expected to be built globally in the coming years, many of which are politically motivated and subsidized by, for example, Europe and the USA, to reduce dependency on Taiwan.
It is rather difficult to assess the fund’s exposure to AI. As can be seen above, most companies globally are currently trying to find use cases. As L’Oreal for example stated in a recent call, it already uses GenAI to optimize its (huge) marketing budget. So while most companies are focussed on reducing costs and optimizing their processes, it is probably fair to say that at least 30% of the fund’s holdings see Artificial Intelligence as a source of additional sales and earnings growth in the future. In its most recent call, SAP, one of the largest enterprise software companies globally, noted that the quality of the data being analysed is crucial for the results of AI. For many companies around the globe, the most valuable data is stored in SAP systems, which gives the German company the opportunity to develop (and monetize) plenty of new applications and use cases.
Sell in May and go away
An interesting study by ‘Topdown Charts’ analysed the performance of the S&P500 by month between 1965 and 2023, and as can be seen in the below chart, selling in May has only been beneficial in bear markets, while the performance of May and the following months has on average been positive in bull markets (with the proxy being the 200-day moving average).
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The probability of a negative return, even in bear markets, between May and October was only 45%, as the chart on the right shows. Both bull and bear markets combined, the probability of a negative return during this period is below 35%. So while the coming months have historically not been great, they have, on average, been positive nevertheless. Which brings us back to one of our key beliefs: time in the market beats timing the market.
On the day of writing this article, MW GESTION ACTIONS EUROPE holds the following quoted securities:
• ASML for 6.7% of its outstandings
• L’Oreal for 2.1% of its outstandings
• LVMH for 4.5% of its outstandings
• Microsoft for 4.0% of its outstandings
• SAP for 1.9% of its outstandings
Written on Amy 13th, 2024
Communication-Marketing
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.
Past performance is not a reliable indication of future performance. Past performance is no guarantee of future performance.
The content does not constitute a recommendation, an offer to buy, a proposal to sell or an invitation to invest.
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