Inflation
Global equity markets have performed well in 2024 so far, with some volatility related to sticky inflation and evolving interest rate expectations. The European Central Bank (ECB) started its cutting cycle in June, and did another cut in September, whilst the US Federal Reserve was more hawkish in their tone, and is only expected to make the first cut in September. The market focus will be on magnitude of rate cuts by major central banks over the next 12 months.
Elections
We saw a lot of election activity this year so far: Europe, France, UK, Mexico, Indonesia, India and others have already cast their votes and activity has ramped up as we draw closer to the US elections due to take place later this year.
Markets
Market performance was dominated by Technology stocks, which have continued to show strength, buoyed by the theme of artificial intelligence (AI). Whilst gains in US equities were again driven by the Magnificent Seven (US stocks: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla) performance within this group was mixed in more recent months. Nvidia has been the strongest performer by some margin followed by Meta Platforms. Telsa’s share price performance in contrast is in negative territory.
On the other side, both Healthcare and Consumer stocks were weaker. For healthcare, this has in part been driven by weak earnings momentum especially in pharmaceuticals and biotechnology. However, the sector is facing some headwinds such as overcapacity and excess inventory since the end of the Covid pandemic. We have now seen an end to the destocking and companies are beginning to invest in expanding capacity. A recent bounce since July suggests to us that we are beginning to enter a more normalised cycle, and we are optimistic that these shorter-term headwinds are abating.
Over the next 24 months or so, we think that we will see more disparity between companies that can protect their margins and those that will struggle because of stickier inflation.”
Within the Consumer sector, luxury goods have particularly struggled due to factors impacting luxury spending from both US and Chinese consumers, in particular the ‘aspirational’ cohort as opposed to the top-end. We believe a recovery in US consumers, and gradual normalisation in Chinese consumer spending, should drive continued growth in the sector, although that recovery could be pushed into 2025 given the more recent consumer sentiment trends.
Our analysis
In our view, the bigger picture remains that while shifting interest rates expectations may drive further style volatility in the nearer term, ‘quality growth’ (the type of stocks we like) should be more supported in general as we now enter into a rate cutting cycle by major central banks.
With the prevailing market backdrop, we continue to seek companies with resilient earnings growth - because of the ongoing risk of estimate downgrades - and that have pricing power. Over the next 24 months or so, we think that we will see more disparity between companies that can protect their margins and those that will struggle because of stickier inflation. That is why it is so important to focus on firms with solid balance sheets and exposure to structural growth drivers; they are the ones which should be able to withstand this backdrop and succeed in the long term in our view.
Growth
Importantly, as long-term investors, our portfolio consists of high-return, compounding businesses, with continued solid fundamentals and outlook. We are confident that they are well positioned to continue to benefit from structural growth drivers in what remains a low-growth environment.
Martin Currie Global Portfolio Trust offers you an easy way to invest in a ready-made portfolio of high-quality growth companies from all around the world.
In terms of portfolio activity, in the last six months we have purchased a number of new stocks for the Trust.
Sartorius Stedim in December, Partners Group in April, Novo Nordisk in May and BE Semiconductors in July.
Partners Group is a high-quality, listed private equity manager. Its robust investment approach and hard-to-replicate product offerings appeal to both large institutional investors and private wealth customers. An interest rate cutting cycle is a more supportive environment for company with scope for a recovery in deal activities.
Novo Nordisk is an organic R&D company focused on diabetes, obesity, and ‘Bio-pharma’. The latter is the development of drug therapies using biological organisms. The diabetes segment is a structural growth category given the stable, low-competition market structure in the global insulin and anti-obesity drug, GLP-1, markets, while obesity has the potential to be the largest drug category of all times by 2030.
…obesity has the potential to be the largest drug category of all times by 2030.”
This has the potential to provide substantial growth even though the market structure will also become more competitive, due to limited patent protection. We believe that the company has the potential to deliver higher sales growth than peers, with industry-leading margins over the next five years.
What’s driving returns?
In terms of portfolio highlights, there have been three key areas of the market which have driven returns in the Trust. Technology remains a key positive contributor to returns, driven by continued enthusiasm for artificial intelligence. Nvidia has been a particular beneficiary of this trend, given its large position in the portfolio, but other positions such as Microsoft have also benefitted.
The other two areas which have weighed on returns are Healthcare and Consumer sector holdings, which detracted during the first half of the year. While these parts of the market have been challenged, our preferred exposure to them has been concentrated in sub-industries which have underperformed the broader sector in the short term.
Sectors: short-term challenges, long-term opportunities
While a post-Covid adjustment has led to short-term weakness in our favoured Healthcare industries, Medical Technology and Life Sciences, we believe investors will be rewarded by taking the longer-term view, as the structural trends underpinning the growth of companies in these industries remain powerful.
We are optimistic for the future however, and believe that a recovery in US consumers, and gradual normalisation in Chinese consumer spending should drive continued growth in the sector.”
Ageing populations and the increasing cost burden of lifestyle-driven diseases will continue to drive technological innovation and efficiency improvements in the Healthcare sector. [We believe…] this should in turn translate into long-term, sustainable revenue and earnings growth for the leading healthcare specialists who are well-placed to harness the growth opportunities in this segment.
Within the consumer sector, our preferred exposure is to luxury goods which have faced short-term headwinds driven by low US and Chinese consumer spending.
We are optimistic for the future however, and believe that a recovery in US consumers, and gradual normalisation in Chinese consumer spending should drive continued growth in the sector.
By focusing on high-quality companies with attractive earnings profiles, we are confident that our holdings are positioned to withstand these challenges and can succeed in the future as the market backdrop becomes more favourable.
STOCK STORY
Ferrari, an iconic Italian sports car manufacturer, has a strong brand and pricing power, attracting investments since 2019.
Looking ahead, we foresee inflation to be stickier and longer lasting with slower economic growth, particularly in the US and China. In Europe and the UK, we continue to forecast ongoing stagflation.
Despite the muted growth outlook, the expected pivot by the western central banks has the potential to be supportive for equity markets and ‘quality growth’ stocks in particular, although we note that expectations of rate cuts over the next 12 months have become very aggressive, and therefore could fuel some volatility with each datapoint on inflation and each central bank meeting.
In our view we are effectively in a ‘hawkish dove’ stance. Central banks are signalling or already taking steps to cut interest rates but might only do so in a timid manner until they are clear that inflation has been tamed.
European and Asian equities currently offer more valuation support relative to history and relative to other developed market equities, although both regions also carry a higher geopolitical risk, and are more cyclically sensitive.
Despite the muted growth outlook, the expected pivot by the western central banks has the potential to be supportive for equity markets and ‘quality growth’ stocks in particular…”
On earnings we expect growth to be fairly pedestrian, corporate earning growth remain mixed following the most recent season for the second quarter results. Earnings momentum is deteriorating and has turned negative in some regions despite Technology and Communications seeing upgrades, with other sectors reporting weaker growth and seeing estimates downgrades.
We increased our top-down earnings growth forecasts slightly for the year, to +6% from +4% previously at the Global level, which remains below consensus.
Overall, we still view economic slowdown as a central scenario in the next 12 months. We also maintain our probability of recession in a 35-40% range - so not the central scenario, but not a negligible risk. We note that some economists have been increasing their probabilities of recession upwards, closer to our range in the past couple of months.
Ultimately, when an economic slowdown is met with interest rate cuts, equity markets should be somewhat supported, in our view, providing that we do not enter into a prolonged recession.
Additional political and geopolitical risks remain high, notably with the upcoming US presidential elections, which bring an element of higher uncertainty on policy direction.
As long-term investors, we are invested in some attractive structural growth trends around artificial intelligence, Energy Transition and Ageing Population, which offer good long-term prospects, although we believe it is critical to maintain valuation discipline to capture the pockets of these themes that still have valuation support.
We do see signs of froth emerging, notably in the AI theme, and have been selectively positioned in areas where we can find strong support from fundamentals and valuations, on companies that can more meaningfully monetise the AI opportunity.
Franklin Global Trust is suitable for tax-efficient wrappers like Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs). To find out more about three easy ways to invest visit our How to Invest section.
What Are the Risks?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.
Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
Opinions expressed are the investment manager’s at publication date and they are subject to change without prior notice.
References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund’s holding at any one time. It should not be assumed that any securities transactions were or will be profitable. The analysis and opinions of the security discussed herein may change at any time. There is no assurance that any security purchased will remain in the portfolio, or that any security sold will not be repurchased. This does not constitute advice or as an investment recommendation for any particular security or sector allocation. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised.
Past performance is not necessarily indicative nor a guarantee of future performance.
