Q2 2025 Manager Update
What’s new in the portfolio and analysis of market events and ongoing trade tariff threats.
Portfolio manager, Zehrid Osmani, explains the market to date, starting with the unexpected Chinese recovery from lockdown, portfolio activity and his outlook for the remainder of the year.
Market Update
A lot of things have happened year to date in the market, starting with an unexpected Chinese recovery from lockdown, which has led the economic momentum to start with, at the first half of the year. We've had the US regional banking crisis with some failures that have had the risk of bringing banking contagion and systemic risk.
We had Credit Suisse, which had to be rescued by UBS with an orderly step in by the Swiss regulators and we had the US debt ceiling debate that went to the 11th hour with potential risk of US government debt default - none of which have actually led to any material flare up in risk and the market has performed strongly, therefore, on that year to date period.
…we also had the euphoria of artificial intelligence with Chat GPT leading to a very strong take-up by users and the spillover into some of the stocks in the technology sector that have performed strongly.
In terms of specifics, we also had the euphoria of artificial intelligence with Chat GPT leading to a very strong take-up by users and the spillover into some of the stocks in the technology sector that have performed strongly. Those notably that have been very exposed to artificial intelligence, such as Nvidia.
As a result, year to date there has been a shift back towards quality growth stocks away from value and that has helped Global Portfolio Trust given its persistent exposure to quality growth stocks. And pleasingly for us, despite the headwinds to performance last year, we haven't made any material changes to our stocks.
We maintain conviction in the stocks that we had exposure to and we maintain focus on quality growth companies and pleasingly those companies have performed strongly year to date, notably in the technology space, as I mentioned.
Why we avoid banks and energy
The other aspect to mention is that not owning banks nor energy sectors have contributed positively. We actually wrote a piece earlier this year about the reasons why we don't own banks from a fundamental perspective.
It really highlights the fact that we continue to focus on companies that have quality growth characteristics, solid balance sheets, lower regulatory risk, as well as companies that have the typical characteristics of the Global Portfolio Trust companies - which are companies that have resilient earnings, that have solid balance sheets, that have strong pricing power and that have exposure to structural growth prospects across the three megatrends that we continue to favour.
we continue to focus on companies that have quality growth characteristics, solid balance sheets, lower regulatory risk…and that have exposure to structural growth prospects across the three megatrends that we continue to favour.
On the macroeconomic side, the other aspect during the year has been the fact that the US economic momentum has been stronger than expected and therefore coupled with the China recovery, this has reduced the risk of a recession.
Our view at the start of the year was that both at the global level and at the US level, we were going to be able to avoid a recession. And pleasingly, more economists and more market commentators have come to our view that a recession could be avoided. That in itself has also helped support the markets.
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Portfolio Activity
In terms of portfolio activity during the year, we purchased Pernod Ricard in the spirit segment. This is an area where we believe there is going to be ongoing pricing power and premiumisation over the medium term and a company like Pernod should benefit from it.
We also purchased Adyen and Mastercard, which we switched out of Visa and we purchased Mettler Toledo, which is a name in the healthcare space that we had previously. We took the opportunity of a significant pullback in the share price to get back into a company that we like in terms of growth profile as well as return on invested capital profile.
We sold out of a couple of companies during the period, one being Kerry as we were switching into Pernod Ricard and the other one being Dr Martens on the basis that that company failed to execute on its momentum notably in the US.
Portfolio highlights
One aspect to highlight in the portfolios here to date is artificial intelligence being an important area of focus by the market given the outsized excitement that has come through from Chat GPT, but also Nvidia's very strong performance both in Q1 and Q2 in terms of operational momentum.
And what's pleasing for us is that Global Portfolio Trust is very exposed to some of these names. Nvidia is the largest position in the trust, but other companies have benefitted, such as Microsoft and Adobe. Both of those are also very exposed to artificial intelligence.
Elsewhere, our luxury good exposure has performed well in the first half of the year, notably companies like Ferrari, which continue to show strong operational momentum.
In the construction space, Kingspan, despite the sector being sensitive to interest rates and therefore facing strong headwinds, has actually come out with a positive profit warning which highlights the company's dominant position in the panel installation space and therefore its strong pricing power, which has helped create that strong operational momentum.
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Outlook and Opportunities
As we look ahead in terms of outlook and opportunities, there's a few aspects to mention.
Firstly, on the monetary policy front, we believe that interest rates are close to peaking and therefore this should be supportive to markets, but also to the Quality Growth styles.
Our view is that inflation will be stickier and longer lasting. There will be some easing of inflationary pressures in the second half of this year due to the elevated base effects of last year, but at the same time central banks will not pivot as rapidly as what the market might expect in H1 of 2024. We believe that a pivot towards interest rate cuts will not happen until the second half of 2024 given the stickier inflation.
We continue to focus on companies that have resilient earnings, that have strong pricing power because of the more elevated inflation, that have solid balance sheets…
At the same time, we continue to focus on companies that have resilient earnings, that have strong pricing power because of the more elevated inflation, that have solid balance sheets in case of risk of recession coming back on, as well as companies that have exposure to structural growth opportunities through our megatrends assessment.
In terms of the megatrends, we continue to focus on themes that are exposed to Demographic Changes, Future of Technology and Resource Scarcity. The eight midterm opportunities that we've highlighted before remain relevant to us as investors. And within that we highlight three particular themes.
Firstly, Energy Transition given the elevated amount of spending by governments to ensure energy transition, whether it's in terms of Renewable & Alternative energy, whether it's in terms of Electric Transportation, both electric vehicle and high speed railway or whether it's in terms of more efficient buildings, given that buildings are an important contributor of carbon intensity.
Healthcare Infrastructure in a world that is ageing as well as a world where 21st century diseases, as one of our theme is important to focus on…
Secondly, Healthcare Infrastructure in a world that is ageing as well as a world where 21st century diseases, as one of our theme is important to focus on, there is an increased need to spend on Healthcare Infrastructure and Global Portfolio Trust has a good exposure to companies that do give us that opportunity to harness that long term structural theme.
And the third one is Artificial Intelligence, which is focusing both in terms of Cloud Computing & Cybersecurity, but also Robotics, Automation & Artificial Intelligence, as well as Quantum Computing and Metaverse and how they are exposed to the Artificial Intelligence.
And finally, the aspects of Technological Fragmentation and Geopolitical Fragmentation related to Artificial Intelligence and semiconductors. So, from that theme specifically, there are a lot of good attractive structural growth opportunities, but there are also potential threats from that Geopolitical Fragmentation, notably with the dimension of China, Taiwan, US.
And therefore it's important for investors to stay active and to stay focused on where the risks might be as well as to manage long term structural growth opportunity efficiently.
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