Stock market broadening

Stock market broadening

Over the past several years, US stock market performance has been led by a number of great technology companies.  We have always been selective, applying our quality criteria and looking for companies with strong growth opportunities, sustainable competitive positions, a high proportion of recurring revenues, experienced management teams and high levels of cash generation. 

We have invested in several of them, including Amazon and Alphabet since the inception of our World Stars Global Equities in 2012, and more recently Nvidia and ASML since 2022 and 2023 respectively.  They have helped our World Stars Global Equities to perform strongly and we are pleased that we have been ranked in the first decile of performance compared to other fund peers over all past periods since inception, including 1 year, 5 years and 10 years on IA Global and other major platforms (although past performance is of course not a reliable indicator of future results). 

The “great rotation” in stock markets that has taken place since the US Fed started raising rates at the end of 2021 has favoured these investments.  Equities are the only large and  liquid asset class that offers investors the ability to generate real returns in an environment of solid economic growth and sustained inflation.  It is perfectly normal for higher growth companies to perform better at first and we still see great value in the technology stocks we hold. 

However, the rotation has left behind many other companies that have high quality and offer great upside as well.  We have positions in consumer, healthcare and industrial companies trading at valuations that are at multi-year lows, in absolute terms and relative both to the market and to their own long-term trading ranges. 

Our approach has always been to invest in a broad set of companies that fulfil our quality criteria and can compound over long periods of time.  Since 2012, technology companies Amazon and Adobe have been the two top performers but the next two are industrial company Eaton and healthcare company Thermo Fisher. 

That is why we have expected stock markets to broaden from their narrow focus on the Magnificent Seven, some of which we think are less magnificent than others.  The first quarter of this year has seen this broadening accelerate as investors have come more selective and the reality of company fundamentals has prevailed over sentiment and hype.

The demand for increasing capacity, artificial intelligence and other applications will be important drivers of growth and productivity for the global economy and our companies, but so will increased healthcare spending and support of an aging population, and the renewal of the public and private asset base in the US, Europe, China, Japan, and just about everywhere else, and the need to address challenges like global warming, energy transition, carbon reduction and  water supplies. Our companies are leaders in these markets and for them these great challenges are great opportunities for growth and value creation.

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