Artemis Global Select Fund update

Source for all information: Artemis as at 30 September 2024, unless otherwise stated.

Review of the quarter to 30 September 2024

After a relatively calm July, August began with a severe sell-off in equities, as the market appeared to have second thoughts about whether potential profits from AI were enough to justify the lofty valuations of the tech giants. The broader market was quick to recover, though, and there was better news in September with a 50bps interest rate cut by the Federal Reserve, a falling oil price and a host of stimulus packages announced by the Chinese government. Growing tensions in the Middle East remain a cause for concern, however.

Against this backdrop, the fund lost 3.7% in the quarter, while its MSCI AC World index benchmark rose 0.5%.

Positives

A couple of our Chinese positions – travel website Trip.com and delivery platform Meituan – reacted well to the stimulus package announced by the government in Beijing.

MTU Aero Engines, a German aeroplane-engine supplier and service company, continued to recover from the supply-chain issues that gave us an entry point into the stock earlier this year. The long-term outlook remains attractive in a tight market: with supply of new engines restricted, existing aircraft are being operated for longer, helping to drive MTU’s servicing business.

Constellation Energy signed a deal with Microsoft and saw good demand from long-term datacentre contracts. Looking ahead, the company’s nuclear fleet still has room to increase non-carbon power generation.

Negatives

Samsung was the biggest detractor from returns during the quarter, down 23.5%. This was due to an elongated slowdown in the semiconductor cycle and manufacturing issues with HBM (high-bandwidth memory) products. Although the company remains on a cheap valuation, we sold out.

The fund’s performance was also hindered by positions in other tech-related names: Amazon and Synopsys. However, we believe these are victims of nothing more serious than a cyclical rotation.

Amazon continues to take market share in ecommerce and is increasing the profitability of its US and international arms. Its cloud division alone generates revenues of more than $100 billion per annum and is growing at 18% year-on-year with expected profit margins in the mid-30s. Yet the company is now on its cheapest valuation in a decade.

As a critical supplier of tools and services to the semiconductor supply chain, Synopsys is benefiting from the move towards larger and more complex chips, while the market seems to have overlooked the value of its merger with Ansys. We added to our position.

Healthcare, where we are overweight, also held us back. Novo Nordisk fell after a US Senate hearing into the pricing of its Ozempic and Wegovy treatments. Meanwhile, some weakness in a less-diversified competitor led insurance provider Elevance Health to underperform on read-across, but we believe its low valuation offsets the risk

Purchases

We added a couple of Chinese positions – Anta Sports and Tencent – following a research trip.

Anta owns the Chinese rights to Fila and other brands and has a 43% stake in US-listed Amer Sports, which owns Arc’teryx, Salomon and Wilson.

Since 2020, Anta has been converting its wholesale-led growth strategy towards retail customers. This has pushed its CAGR (compound annual growth rate) into the mid-teens and raised its gross profit margins to more than 60%, driving EBIT (earnings before interest and tax) into the low 20s – well ahead of global peers (Nike sits at about 10% even though its revenue base is five times larger).

We expect low double-digit annualised revenue growth at Anta over the medium term, led by ongoing store expansion and faster growth at its smaller brands. Yet its shares trade at a 20% discount to their five-year average, even though gross margins have expanded by 500bps during the period and free cashflow has trebled.

Tencent operates a ‘super app’ that is both the number one online gaming and social media platform in China. Despite the difficult macro environment, it has continued to increase revenues and push operating margins back above 30% while generating strong free cashflow. We feel that with a P/E of about 16.5x for 2025, the company and its future earnings stream are undervalued compared with global peers.

We also added SMC, a Japanese industrial company, which is the largest player in its market and has pre-tax profit margins up to the mid-30s. It has been on our watchlist for some time as we waited for an attractive entry point; when a cyclical slowdown pushed the shares on to a steep discount to their long-term average, we bought in.

Sales

In terms of sales, we sold out of Alphabet on strong share price performance before the August slump, then gradually took profits from Apple as the quarter wore on.

It was a similar story for Texas Instruments. The semiconductor company has rerated sharply to a premium valuation versus history and peers, meaning there are better opportunities elsewhere in companies that are benefiting from the same long-term themes but that are going through a short-term cyclical slowdown.

Geographically, the fund is overweight Europe and emerging markets (China, India, Mexico and Brazil). It is now underweight the US, in contrast to being overweight at the start of the year.

Outlook

The set-up going into 2025 should give markets reason to cheer. Most central banks appear to be fully ‘in play’ and willing to support their economies with rate cuts, as fears of slowing growth have overtaken fears of inflation.

The China policy put is also now unexpectedly in play. However, here we will be watching for the size and extent of fiscal stimulus that the government is willing to use to support the economy, rather than looking at monetary policy and more rate cuts. The average Chinese household is sitting on far higher savings than before the pandemic and has paid off its mortgage and other outstanding debt. Unleashing some of this spending power will be key to seeing a more sustainable economic growth trajectory going forward.

For central banks to remain supportive and the global growth picture to remain benign, inflation will need to remain under control. With escalating tensions in the Middle East affecting the oil price and more stimulative macro policies globally, we are not yet out of the woods on this front.

But it is important to remember that the economy and the market are not the same. The fundamentals for the latter have held up surprisingly well over 2024 with one reporting quarter to go. In normal years, analysts tend to start at 10 to 15% EPS (earnings per share) growth and cut continuously through the year. However, so far in 2024, analyst consensus looks on track to record EPS growth of more than 10% for the MSCI AC World index, a number that has remained remarkably steady throughout the year given the continuing growth concerns.

Optimism has stretched into 2025 with consensus EPS growth of more than 13% after recent upgrades. Markets are expecting information technology and healthcare sectors to deliver the bulk of this growth. So, while a supportive macro environment is helpful, performance will largely depend on company specifics and industry dynamics.