June 2023 Update
Narrow minded

June, 2023

Equity markets were only mildly negative in May helped by investors' conviction that the US debt negotiations would reach a compromise and that interest rates are likely to have peaked and will be reduced sometime this year. The former appears resolved but the latter appears wishful thinking.

Equity price changes in May were actually extreme in so far as the spread between best and worst performing was extraordinarily wide - at least in our global stock universe. NVDA and other US tech stocks got the headlines, but Japanese companies in tech, about which we have been very positive for a while, rose strongly too. Advantest rose 60% + Ibiden +25% Tokyo Electron Hoya more than 20%. The narrowness of the US equity market should serve as a warning. After such narrowly based moves, the market typically either breaks out to the upside or the downside meaningfully. Our expectations are for higher rates and falling eps estimates.

Base effects will convey the impression of falling rates of annual inflation but the models we use provided by our macro economists, suggest that 4% will be a base - put another way, pretending that the true rate of inflation is 2% will now become an exercise in pretending that the true rate of inflation is "only" 4% and a price worth paying / is good for you to quote Janet Yellen. So 4% inflation is the new 2%. Interest rates are still barley positive in real terms.

Still the best way to preserve purchasing power is to invest in dividend paying equities with sound balance sheets and management that invests sensibly.

Consumer stress is increasingly evident in the US and shares in especially the discount retailers such as Dollar General (not owned) got hit hard late in the month. These companies service lower income groups and it's a clear message about how income stress is first being felt in lower income cohorts. US house prices appear to be falling along with commercial property prices and investors have sought refuge in companies such as NVDA to play the AI theme. However this equity is trading at >35x revenues! Perhaps it's 'deja vu all over again' to quote a Mr Berra? Chasing themes such as the Metaverse and SPACs ended badly for investors, not because the business possibilities were flawed but because share prices became over promoted and valuations impossible to justify. AI might be another such event for certain stocks?

We prefer Japanese technology companies about which we have written frequently before. https://www.delftpartners.com/news/views/advantage-advantest.html

China's economy is struggling to overcome its own property bubble and trusting official figures on industrial output is probably unwise. The return to normality or the Chinese version of normality is likely however to be supportive of certain equity prices.

In a tacit acknowledgement that supply side policy has wiped out the natural benefits to the consumer of a competitive economy, retail food price controls were imposed in France and are being mooted by the UK. We wrote about this too although we thought the US would be first off the blocks. https://www.delftpartners.com/news/views/october-2022-update-a-litany-of-warnings-and-complaints.html

Our view would be that MORE competition enabled by lower taxation, less regulation and fewer subsidies to NOT produce, would be the answer to provide consumers with both choice and lower prices. Oh well.

We sold Hoya reinvesting in NGK Insulators in Japan. International Paper, ONEOK, and AES fell - we sold AES which somewhat reduces our positive ESG bias relative to the benchmark, but ESG alone is insufficient to provide returns to meet clients' future funding needs. The naïve implementation of ESG is coming under greater scrutiny.
The Growth style has outperformed Value style by about 7% ytd and probably represents a 'snap back' from last year's strong outperformance by Value. Our Global 30 and Infrastructure equity portfolios outperformed meaningfully, whereas the global trust underperformed with no active exposure to the few large cap stocks that rose.
We have a modest bias to Value and are still pondering the banking sector where we remain underweight.

Delft Partners June 2023