Artemis Funds (Lux) – Global Select update

The fund returned 3.7% (in US dollar terms) over the quarter, behind a return of 6.2% from the benchmark MSCI AC World Index. 

Inflation has continued to fall gradually in the US, as higher interest rates, quantitative tightening and tougher bank lending conditions take effect. However, economic data points have showed resilience (particularly high employment) and therefore the likelihood of a ‘soft landing’ is growing. As a result, consumer discretionary, industrial and materials/energy sectors led global stocks, whilst utilities, healthcare and consumer staples (historically defensive sectors) lagged.

Global equity markets have recently been driven by large-cap tech stocks. Not owning Apple or Nvidia detracted from our performance during the quarter. Our overweight to healthcare also held us back. The US performed better than Europe, Japan and China (the weakness of whose economic recovery has negatively surprised the market).

The reopening recovery in China has been sluggish. The property market is still challenged, youth unemployment is high, and industrial capex has not picked up meaningfully. There are rumours of stimulus packages to come, but they will be measured and gradual. The Hong Kong index and Chinese stocks lagged global indices, whilst US equities outperformed.

Activity

We sold out of industrial technology company Trimble. Whilst the long-term trends are supportive, the company has some tough execution challenges ahead of it.

We sold hearing aid manufacturer Sonova (which lost market share and a key customer contract) and mining equipment company Epiroc. In technology, we bought Intel (a beneficiary of the US 'CHIPS' Act) and LAM Research.

Elsewhere we added to Estée Lauder as it is exposed to secular growth in premium beauty products, and fragrance adoption in Asia. Recent headwinds in China have led to some inventory challenges and these have weighed on the share price.  We expect these issues to be resolved over coming quarters. In the meantime, this offers an attractive buying opportunity for a longer-term investor.

We reduced the holding in Accenture as the near-term outlook for consulting projects weakens, although we continue to like its best-in-class business model and growth dynamics. We also trimmed Salesforce which has performed well over the year to date as the margin expansion story has played out successfully.

The fund remains underweight US and overweight Japan and Europe where we have found better value for money this year. We are modestly overweight healthcare (a sector which has underperformed year to date) as we are attracted to its secular growth.

Outlook

Markets have been driven by a narrow group of technology stocks this year. Seven stocks make up 50% of the global index's (the MSCI ACWI) performance year to date (in US dollars). Defensive areas of the market such as healthcare and consumer staples have lagged, despite higher interest rates and still elevated inflation. The portfolio remains balanced, with holdings across growth names and more defensive sectors, which should benefit if economic conditions deteriorate.

There is an unusual degree of divergence between different economies currently, with the US, Europe, UK, China, Japan and emerging markets all at different stages of the economic cycle. The US appears resilient for now. Japan remains differentiated having had a total absence of inflation for many years, so is more tolerant to its return. We remain overweight in Japan.

While the reopening recovery in China has so far been slower than expected, the government will likely respond to a challenged property market and high youth unemployment with stimulus programmes. Animal spirits should return over time and our Japanese stocks, along with our holdings in luxury and consumer goods, are well positioned to benefit.