We are long-term investors and aim to find the best companies to invest in them for a long period of time. The increase in market volatility at this time of the year, and before the US Presidential Election, is in line with historic patterns. As stated many times before, the companies we own have on average hardly any debt, which is a big benefit in case we will see another big crisis. These companies have proven over the last years that they can master even a standstill of the global economy, as can be seen by their increase of earnings during the Covid crisis. In times like these, it is essential to not try to time the markets or do short-term trades according to an ever-changing narrative. The narrative for 2024 changed from the expectations of ‘many rate cuts’ at the beginning of the year, to ‘no rate cuts’ at all, to suddenly fears of a recession and even hopes for ‘emergency rate cuts’! In addition to that, according to odds, Donald Trump was on his way to an easy win of the US elections until recently, when suddenly Kamala Harris took the lead in some polls. As mentioned before, we invest in great companies and keep them for the long term. In volatile times it is essential to not get distracted or panic, but to stick to the investment strategy.
What happened in the markets last month
In the US, the S&P 500 and the Nasdaq posted new records at the beginning of the month. But as mentioned in my last monthly comment, historically at this time of the year, volatility picks up sharply. So when data showed that inflation hit the lowest levels since 2021, this year’s winners were sold massively, and the Nasdaq experienced its worst day since 2022. At the same time, US small caps rose sharply and outperformed large caps by the most since at least 1978. Odds for a September rate cut went to nearly 100%, and lower interest rates are regarded as positive for small caps (as for example a large portion of debt of listed US small caps is floating). Truflation’s real-time US inflation gauge has moved down to 1.6% at the end of the month, the lowest level in the past year. In addition to that, political uncertainty is increasing. After Donald Trump survived an assassination attempt, the odds of him winning the election increased sharply, but fell when Joe Biden decided to not seek re-election. This as well led to big rotation between sectors (and countries): first, potential winners of a Trump election were bought, then later partly sold again. To put all of this into perspective, though, the S&P 500 Index on 24 July fell over 2% for the first time in 356 trading days, which ended the longest stretch without a pullback of more than 2% since 2007.
In European politics, the Labour party won a huge majority in the UK elections, while in France the elections led to a hung parliament, which led Moody’s to warn on the outlook for French debt. Inflation in Europe remained relatively sticky. The Japanese Yen hit the lowest level since 1986 against the US-Dollar before the Bank of Japan hiked interest rates at the last day of the month, and the Chinese 10-year yield declined to the lowest since at least 2002. China cut interest rates as the economy remains weak, and existing home prices in the country fell by 7.9% in June, its largest decline in history.
What happened in the fund last month
The above-mentioned events led to higher volatility and big moves of sectors and individual stocks. It is very important to point out that we do not attempt to try and predict the outcome of elections and buy or sell potential winners or losers based on this. It may be true that highly indebted companies will benefit the most from falling interest rates, especially if most of the debt is variable and short-term. As long-term investors, though, we clearly prefer companies with only very little debt, or ideally, net cash. Usually, the impact of political events is rather short-lived, as can be seen by the fact that many US indices hit all-time highs recently, despite various different presidents over the past years (and decades), and despite Covid, which brought the whole world to a standstill. It is our belief that earnings are the key driver for share prices over the long-term, therefore we try to identify the companies with the best prospects for steady earnings growth.
The earnings season started again in July, and in the short-term, the uncertainty in France seems to have affected some companies. Dassault Systemes reported the postponement of some deals and partly blamed the political uncertainty in Europe and the US for this. It was the company’s first profit warning since 2013, but it is important to note that the deals were postponed, but not cancelled. Edenred reported rather solid results, but the political uncertainty in France is not helpful regarding potential changes in the meal voucher regulation. And LVMH is not going to start a new share buyback program as long as the political landscape (especially regarding the taxation) is unclear. Nevertheless, the fund’s overall exposure to France is very limited.
As mentioned before, the technology sector struggled this month, and here especially the subsector of semiconductors. While earnings were overall solid, the sector had its worst day since 2020 after Bloomberg reported that the Biden administration had told allies that it is considering using the most severe trade restrictions available if companies such as Tokyo Electron Ltd and ASML Holding continued giving China access to advanced semiconductor technology. On the back of this, ASML shares experienced a major selloff on that day despite the publication of solid results for the second quarter of the year. It is important to remember that ASML had reported a disappointing order intake for Q1 (after a record order intake for Q4 2023), and there were fears that orders may be underwhelming going forward. Q2 bookings, though, were significantly above estimates, and regarding the potential new trade restrictions the company stated that it bases its outlook on global chip demand, and not on sales in different regions. More chips are needed going forward, and if they cannot be built in China, they will be built in other countries. It was confirmed that 2024 will be a transition year, and that strong growth is expected in 2025. In this context it is encouraging to see that the world’s biggest chipmaker, Taiwan Semiconductor Co, reported very strong Q2 results and upgraded its Capex guidance. The majority of these investments will go into new technologies (for which ASML’s machines are needed). For a more medium-term perspective it is interesting to look at the below graph, which was presented by VAT Group during the Q2 results presentation and shows that circa 100 fabs are coming online in the next 2 to 3 years.
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Source: VAT Group
The sentiment in the luxury sector has been poor in recent months, and LVMH’s Q2 results were rather underwhelming as revenues fell 1%. The theme remains unchanged, though, as the so-called ‘aspirational customers’ (i.e. younger, less wealthy) remain under pressure due to the high inflation, which led to significant price increases over the last few years. The richest customers on the other hand remain unaffected, as the strong performance by Hermes shows. Q2 revenues increased by 13%, and the company sees no weakness overall. In its earnings call, Hermes showed an interesting chart regarding its long-term performance of sales and net profits:
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Source: Hermes
Many other luxury companies have performed in a similar fashion. LVMH’s sales, for example, were at 54bn in 2019, 45bn in 2020, and then nearly doubled to 86bn in 2023. These are very big numbers, and at some point a consolidation period should not be surprising.
At the last day of the month, Reuters reported that the US may exclude Japan, the Netherlands and South Korea in new China chip export restrictions. And in some of the most recent surveys for the US election, Kamala Harris lead Trump. This is another reason why we believe that market timing is incredibly difficult, and time in the markets beats timing the markets.
The MW Actions Europe fund is a sub-fund of the Luxembourg SICAV MW ASSET MANAGEMENT. Please contact MW GESTION fund management or your financial advisor for further information.
At the time of writing, MW GESTION ACTIONS EUROPE held the following listed securities:
1. ASML for 6.5% of its outstandings;
2. Dassault Systemes for 0.7% of its outstandings;
3. Edenred for 0.2% of its outstandings;
4. Hermes for 2.6% of its outstandings;
5. LVMH for 3.7% of its outstandings;
6. VAT Group for 1.6% of its outstandings;
Written on 5 August 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.
Further information is available on the company's website: www.mwgestion.com, in French, English and Italian.