Investment Commentary October 2023

Investment Commentary October 2023

We have been deeply affected by the attack on Israel last Saturday and the images of horror that have gone around the world.  We have always believed that it should be the goal of countries and their leaders to deliver peace and prosperity to their people over time.  As hard as it seems right now, we hope that peace will prevail and that the lives and livelihoods of innocents are spared.

Prominent market commentators and research providers are calling for a market crash because of the rise in rates. Markets have sold off in September as short-term investors have sought to position themselves and taken profits.  For our World Stars Global Equities, like last year it has been driven entirely by factors like value over growth and short duration over long duration businesses. 

We invest in companies not markets because it is company fundamentals that generate value over the long-term. Micro is what we do, macro is what we put up with.  We do have macro-economic views but they are built bottom-up, from the fundamental research we do into the companies we buy and hold.

One of the macro arguments is that peaks in interest rates have often been followed by crises and market sell-offs.  It is undoubtedly true that rates are often cut because of crises but correlation is not causation.  We have combined an annotated graph of the US 10-year treasury yield with a graph showing the performance of the S&P 500 and MSCI World over the same period.  The message is as clear as it is obvious.  Central banks have managed rates proactively to offset the affects of geopolitical and macro-economic events but company fundamentals have prevailed, generating great value for investors who kept owning them.

What the graph of US 10-year treasury yields does show is that the period we have experienced since the global financial crisis is coming to an end and rates have finally normalized.  A world of interest rates at 4-6%, inflation of 2-4% and real interest rates of 0-2% is a world to look forward to, not to fear.

To preserve and increase the real value of assets in an inflationary environment you need to own companies that can grow because of the innovation they deliver or the markets they are in, have pricing power to offset inflation, have scale to absorb cost increases, and have strong balance sheets and cash flows so they do not rely on debt for their financing and can reinvest in their businesses or buy other companies.  That describes the quality companies we own.

With moderating inflation, rates at or close to a peak, full employment, strong demand and attractive valuations, we think we are at a level from which markets and our companies can perform.  There is a lot of cash on the sidelines that is hoping to time a market pull-back.  We already have had a short-term pull-back in September with a rotation from growth to value.  Once it becomes clear that rates have peaked we think markets are poised to perform. 

Another factor is China, where the main issue is confidence and the government is taking decisive steps to stimulate the economy.  The first positive signs are emerging and if the government is able to reenergize the real estate sector and get it to complete the many half-finished developments, confidence could return quickly.  The most recent data was positive and a turnaround would take many by surprise.  

Luxury items like Hermes or Louis Vuitton handbags never go on sale but the companies that make them do.  Our insight this month discusses our outlook for the luxury sector.   Long-term demand for luxury goods is powered by the aspiration of consumers, the increase in middle-income families and the brand equity and pricing power of the companies that make them.  Chinese consumers account for almost a third of global luxury demand, their number will double by 2035 and they have only started to go shopping.

All of this could take place much sooner than many people think and means that investors should be guided by fundamentals to take advantage of market volatility.  Caveat venditor – seller beware !

Read the full article here 

Close Menu