Market Update
For another month the earnings seasons and company specific news took a back seat compared to macro and geopolitical events. On the 24th of February, Russian forces invaded Ukraine, sending rates and equity markets lower and key commodities sharply higher. Investors are now backing off from their assumption of a 50-basis point interest rate hike in March by the FED. Redburn, a research boutique, estimates that the surge in oil prices will lead to year-end inflation in the U.S. and Europe being about 100 basis points higher than previous estimates. The ECB is now estimating that the conflict will decrease Eurozone GDP by 0.3-0.4 percent in a moderate scenario and up to one percentage point in case of a more serious outcome. This result could be higher near[1]term inflation, but a weaker economy leading to demand destruction and lower inflation than expected in 2024.
Contribution to the Portfolio
Among the top three contributors to performance in February were Bank Central Asia, Amazon, and AIA Group. Indonesian Bank Central Asia has risen strongly since last summer on the back of rising global rates. BCA has a high CASA (current and savings account) ratio of 79% vs a sector average of 60%. Having a high CASA ratio means that the bank can fund itself cheaply as rates on savings accounts are low and thus will benefit as costs for funding will rise slowly boosting interest margins.
Amazon’s shares have been moving sideways for almost two years after the sharp runup during the initial pandemic. The shares have been held back by fears of increased labour costs for its 1.6 million employees, supply chain disruptions and a heavy investment program. During its earnings call in early February the company seemed more positive on staffing issues and disclosed for the first time that its advertising revenue came in at USD 31 Billion in 2021, up from below USD 3 Billion in 2016. Shares of AIA Group held up well in what was a turbulent February for the equity markets. The company does not report full year numbers until March but is expected to have seen growth in new business value (the present value of future profits associated with new business written during the year), in the low teens.
Among the top detractors were Home Depot, HDFC and Sony. Home Depot, one of the last companies in the portfolio to report fourth quarter earnings, delivered comparative sales growth of over 8%, largely driven by price increases. Sceptics pointed to the strong revenue growth in 2021 leading to a higher bar for 2022 and sent the shares sharply lower. We would point to a company that continues to execute and with a long-term investment plan that should give the company a path to USD 200 Billion in sales, resulting in mid-single digit comparative sales growth and double-digit earnings per share growth.
Paying less than 20x for such a company, now with a more resilient sales mix as half of sales now are towards professional customers, is a very attractive proposition. HDFC, reporting early in the month, grew home loans 16%, significantly outperforming the Indian bank sector’s 9% growth. However, lending to the corporate sector was soft and net interest income growth was only 2% over last year. Sony, which saw its shares dragged down by the general technology-focused selloff is responding to Microsoft’s acquisition of Activision, by itself acquiring leading game developer Bungie. While the acquisition at USD 3.6 Billion is much smaller compared to Microsoft’s tie-up with Activision, this is a welcome strengthening of Sony’s lead in the gaming platform business.
Changes to the Portfolio
There were no changes to the portfolio during the month.
DISCLOSURES
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