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March Outlook

Attending several recent conferences and company meetings, following the corporate reporting season, has allowed us to test individual investment cases and also pull together some coherent thoughts on what corporates are seeing and doing today. These have high-level implications that readers may find useful. We will provide further detail, including how it relates to our portfolio holdings, in our quarterly letter.

We are seeing the commencement of several positive cycles. Flavour and fragrance ingredients, memory, life sciences tools, paper and packaging, and US onshore wind are all examples of sub-sectors which have already witnessed a sharp downturn but have now moved from stabilisation into a genuine recovery phase. Conversely, the agricultural cycle has rolled over, with debate now centred around whether 2025 will also be a down year. Despite the AI boom, corporates remain cautious about global IT services spend, particularly relating to hardware, meaning the much-anticipated PC replacement cycle has been pushed to the right.

Power grid bottlenecks, which we discussed in our Q3 2023 letter, are rapidly emerging as the critical feature in the energy transition. This has been intensified by the enormous energy demands of AI and means this issue is of broader significance to equity markets, given the large concentration of market cap now exposed to the AI ‘theme’. There is a realistic scenario that lack of grid investment could act as a constraint to growth.

Linked to the energy transition, we have also investigated several interesting ‘capital cycle’ related opportunities within the building materials sector. Several niche products, such as natural gypsum in the US, now have remarkable pricing power and sustainable margin potential. Taking the gypsum example, this is because no new capacity is coming on due to environmental restrictions, while the competing, or substitute, synthetic gypsum volumes are being decimated because it is a by-product of coal-fired power plants.

Finally, we continue to investigate potential investments for the fund across a diverse opportunity set: flavour and fragrance ingredients, life sciences tools, chemicals, exchanges, utilities, semiconductors, software, and a handful of ideas in Brazil all feature among our current work-in-progress. The breadth of ideas speaks to our ongoing opportunity to offer investors a well-balanced, attractively valued opportunity to highly concentrated, momentum-driven benchmark indices.

Market Overview

Global equity markets remained buoyant in March (MSCI ACWI +3.1% total return in USD), taking the year-to-date return to +8.2%. MSCI ACWI Growth returned +2.1% compared to MSCI ACWI Value +4.3%, in a reversal of prior style leadership, albeit large cap continues to dominate smaller companies (MSCI ACWI Equal Weighted +1.8%). The Fed maintained its stance of three interest rate cuts this year and the US 10-year bond yield was flat at 4.3%. In the background, economic growth remains resilient. This is most notable in the United States, but even economies with a more challenging backdrop such as the UK, the Eurozone and even China have seen some combination of GDP growth above forecasts, lower inflation, and positively inflecting leading indicators (e.g, PMIs).

 

Strategy Update

Performance

The fund returned +5.5% in March. In comparison, the MSCI ACWI index returned +3.2% (all in GBP). Since inception, the fund has returned +27.4%, compared to the global benchmark’s +26.0%.¹

Baker Hughes (+13% in GBP) was the largest positive contributor. The share price benefitted from stronger commodity prices and the news that Qatar plans to boost its LNG production capacity to 142 million mt per year by the end of 2030. We held a meeting with the company, which reinforced conviction in the investment case. Samsung Electronics (+12%) rose as evidence builds that memory pricing is likely to be higher than current analyst expectations. Our original investment case was based on newfound capacity discipline within the oligopolistic supply structure, but this has been supercharged by the positive demand implications of growth in usage due to Artificial Intelligence. There were no material negative contributors to performance. Owning no shares in Apple and NVIDIA offset one another in relative performance terms, with Apple underperforming and NVIDIA continuing its remarkable strength.

 

Activity

We added no new positions during March. We exited a position in Shell as the shares traded close to our fair value and technical indicators became less attractive. With other companies within the portfolio offering better risk-reward and similar portfolio construction benefits, there was opportunity cost to holding the shares.

¹Inception: 7 July 2022. Fund: F share class (GBP), midday to midday pricing. Benchmark: close-of-business to close-of-business pricing. Performance shown to 28 March 2024 due to UK bank holiday on 29 March.

 

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