NEWS
1 Feb 2023 - Did Amazon cancel Christmas?
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Did Amazon cancel Christmas? Alphinity Investment Management December 2022 Christmas fever was running high with beautifully decorated trees and colourful lights cheering us on every corner. The tone was however a lot less cheery when Amazon recently reported their 3Q22 results and downgraded their 4Q22 revenue guidance. Similar sentiments were reflected across a large range of consumer names noting pricing pressure and a lack of holiday shopping visibility. There is also clear evidence that inventories have been building across US retailers with supply chain constraints lifting and post covid "revenge spending" tapering off. We maintain our preference for companies with strong pricing power, exposure to the more resilient high-end consumer and companies with global reach that can also benefit from a China reopening. LVMH, MercadoLibre and Starbucks are three diverse consumer names that we believe can withstand a less cheery Festive Season. Why Amazon's revenue downgrade is a concernAmazon is a behemoth e-commerce platform with tentacles across most consumer channels and verticals. They have access to extensive supporting data that can paint a clear picture of the general consumer outlook. Historically we have seen Amazon downgrade earnings expectations, but this is the first time in many years that they've downgraded revenue expectations. The fourth quarter outlook is specifically prevalent given that it includes big spending days in the US, such as Black Friday, Cyber Monday, and Christmas. Amazon cited slowing consumer trends particularly in the US and Europe and a lack of holiday season visibility. Whilst there were several consumer companies that reported relatively good 3Q22 results, outlook statements echoed Amazon's concerns and remained cautious around peak season sales and beyond. Consumers are still nervous and hunting for bargainsSofter economic data points are now becoming more frequent following the flurry of central bank interest rate hikes year to date. The US composite PMI slipped to just 44.6 in December, US housing continues to cool down, layoffs are surging, and consumer sentiment remains at levels last seen in 2009 despite a recent recovery. US consumer spending has remained relatively resilient during 2022 as households continued to draw on excess savings accumulated during the pandemic. Post COVID pent up demand have been driving a revenge spending cycle focused on travel, leisure, occasion-based spending (for example weddings), beauty, entertainment and more. Recent data points however suggest a softening in these trends with consumer wallets facing more constraints (softer macro/inflationary pressures). According to Evercore ISI's December company surveys, current holiday sales remain focused on consumer staples products while discretionary category sales are slow, and consumers are focused on discounted goods. More broadly pricing power continues to soften across industries from elevated levels as global growth slows. Pricing power continues to soften across industries
Source: Evercore ISI, December 2022 Signs of inventory build are intensifyingMany companies across a range of sectors reported higher inventory levels during the 3Q22 results season. A result of continued supply chain disruption improvement and softer demand. Target (US general merchandise discount store) and Nvidia (inventor of graphics processing units) were two examples of big bellwethers that guided to big inventory build, - adjustments, and/or write-offs. Our detailed analysis of inventory levels for a sample of 30 global consumer stocks across retailing, food, and apparel, suggest a sobering level of inventory build across the consumer landscape. We looked at the change in inventory as a % of sales and inventory days (average number of days a company holds its inventory before selling it) between the latest reported quarterly numbers (3Q22) and the same quarter last 2021 heading into the Festive Season (3Q21). The results showed that there are only 3 stocks with lower inventory days and only 5 stocks with lower inventory as a % of sales in our sample. There is specifically a clear inventory build in sportswear with Adidas, Puma, and Lululemon the worst offenders. For example, Adidas's inventory to sales is now almost 30% up from c17% at 3Q21 and Lululemon's inventory days are up from 126 days to 150 days (see chart below for the change in Inventory Days) over the same period. Increased inventories a concern across many consumer names
Source: Alphinity, Bloomberg, December 2022 Positioning in companies with strong inventory management and pricing powerAlphinity invests in quality companies that are in an earnings upgrade cycle that trade at a reasonable valuation. In our view, excellent inventory management skills and strong pricing power will be critical in determining the winners vs losers in the 2023 consumer race. Companies that can withstand margin pressures in an environment where business offload excess inventory and consumers hunt for bargains. Investing in quality companies at the right time in their earnings cycles
Source: Alphinity, December 2022. Note: Alphinity currently owns LVMH, MELI & SBUX, but not AMZN & TGT. Pricing power remains critical: LVMH, the world's largest luxury group, is currently our biggest position in our Global Equity Fund as we head into 2023. Demand for their luxury products have remained resilient despite slowing macro trends, with the company able to pass through inflation given their very price insensitive customer base. LVMH has been in an impressive earnings upgrade cycle since 2020, delivering earnings growth across sub-segments, brands and increasingly across geographies. Management also remains confident in a demand recovery in China once restrictions have lifted. Despite the relative strong performance of the last 12 months, the company still trades at an undemanding 22x 12-month forward Price to Earnings, which is at the bottom of its 5-year trading range (20-35x) LVMH - Strong pricing power & resilient demand drive an impressive earnings upgrade cycle
Source: Alphinity, Bloomberg, December 2022 The US consumer is not the global consumer. Certain emerging market countries, such as Brazil, are ahead in the business cycle vs major developed markets, where inflation, interest rates and unemployment are already past peak levels. MercadoLibre (MELI), is the largest e-commerce and fintech company in Latin America, with over 88 million subscribers and exposure across 15 countries. MELI has a unique eco-system model with their marketplace, payments, credit, logistics and other services all reinforcing each other, driving strong top line growth. MELI's reported very strong 3Q22 results well above their peer group, with accelerating sales growth and margin expansion reflective of their core strengths, including their broad category base, continued logistics improvements and a step change in marketing. Management noted they continue to "manage for growth and market share leadership" MELI consistently delivering strong Revenue growth and Operating margin expansion
Source: Bloomberg, December 2022 China reopening will be an important earnings driver of 2023 earnings for multi-national companies: Starbucks (SBUX), is the leading specialty coffee retailer in the world, operating across more than 80 markets through company-operated and franchised stores. SBUX experienced a tough time during COVID, with many store closures resulting in a big drop off in sales and margins across all markets. Looking ahead, we expect their new strategy to drive a strong recovering in same store sales growth across their international markets and a return to profitability. SBUX is also well positioned to benefit from a China reopening, where they continued to open new stores during the pandemic (going from 4123 stores at the end of 2019 to 6000), that can return to profitability. China Same Store Sales Growth - Potential to rebound on reopening
Source: Bloomberg, December 2022 We will only know during the first quarter of 2023 if Amazon did indeed cancel Christmas and if general market jitters were justified. Regardless, good inventory management, strong pricing power and the right geographical exposures will remain critical elements for consumer companies as they navigate yet another tough macro year ahead. At Alphinity we will continue to do bottom-up analysis and global company visits to find the highest quality companies that have these attributes and can deliver higher than expected earnings. Author: Elfreda Jonker (Client Portfolio Manager) This information is for advisers & wholesale investors only. |
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Funds operated by this manager: Alphinity Australian Share Fund, Alphinity Concentrated Australian Share Fund, Alphinity Global Equity Fund, Alphinity Sustainable Share Fund Disclaimer |
31 Jan 2023 - Performance Report: Delft Partners Global High Conviction Strategy
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31 Jan 2023 - Performance Report: PURE Resources Fund
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31 Jan 2023 - Performance Report: Bennelong Twenty20 Australian Equities Fund
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31 Jan 2023 - Global Matters: 2023 outlook
30 Jan 2023 - Performance Report: Altor AltFi Income Fund
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30 Jan 2023 - Performance Report: PURE Income & Growth Fund
[Current Manager Report if available]
30 Jan 2023 - Performance Report: DS Capital Growth Fund
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| Fund Overview | The investment team looks for industrial businesses that are simple to understand, generally avoiding large caps, pure mining, biotech and start-ups. They also look for: - Access to management; - Businesses with a competitive edge; - Profitable companies with good margins, organic growth prospects, strong market position and a track record of healthy dividend growth; - Sectors with structural advantage and barriers to entry; - 15% p.a. pre-tax compound return on each holding; and - A history of stable and predictable cash flows that DS Capital can understand and value. |
| Manager Comments | The DS Capital Growth Fund has a track record of 10 years and has outperformed the ASX 200 Total Return benchmark since inception in January 2013, providing investors with an annualised return of 12.13% compared with the benchmark's return of 8.65% over the same period. On a calendar year basis, the fund has experienced a negative annual return on 2 occasions in the 10 years since its inception. Over the past 12 months, the fund's largest drawdown was -15.63% vs the index's -11.9%, and since inception in January 2013 the fund's largest drawdown was -22.53% vs the index's maximum drawdown over the same period of -26.75%. The fund's maximum drawdown began in February 2020 and lasted 6 months, reaching its lowest point during March 2020. The fund had completely recovered its losses by August 2020. The Manager has delivered these returns with 1.69% less volatility than the benchmark, contributing to a Sharpe ratio which has fallen below 1 five times over the past five years and which currently sits at 0.88 since inception. The fund has provided positive monthly returns 88% of the time in rising markets and 32% of the time during periods of market decline, contributing to an up-capture ratio since inception of 63% and a down-capture ratio of 68%. |
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30 Jan 2023 - Equities 2023 - What's the bigger risk?
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Equities 2023 - What's the bigger risk? Insync Fund Managers January 2023 Insync Funds Management CEO, Monik Kotecha, says there's no denying that 2022 was a difficult year for equities - but as one US commentator recently pointed out, years in which the S&P was down more than 18%, as it was in 2022, have been followed by years of 20% plus returns, every single time for the past 90 years. This, plus a few other key factors identified by Insync suggest that standing on the sidelines may pose a bigger risk than investing. Equities 2023 - What's the bigger risk? As we enter 2023, Insync Funds Management CEO, Monik Kotecha says standing on the sidelines may pose a bigger risk than investing. Everybody, and their mother, brother, sister, cousin, and uncle, is negative on the first half of 2023. Wealth destruction was the dominant theme of 2022. The global equity market shrank US$15 trillion in market capitalization, while global bond markets saw US$30 trillion in value wiped out. Virtually every asset class declined. Oil held up better, rising strongly in the first half but correcting as global growth expectations faltered, ending the year flat. The US dollar was the big winner, which rose 9% year-to-date. Cash, which was considered 'trash', gained 1.8%. High inflation, slowing growth and monetary tightening largely characterized the global economy throughout 2022. Rising inflation and slowing growth created stagflation concerns. But we think the market may surprise on the upside in 2023. The impact of 2022 There's no denying that 2022 was a difficult year for equities - but as US senior investment analyst, Luke Lango, from InvestorPlace recently pointed out, years in which the S&P was down more than 18%, as it was in 2022, have been followed by years of 20% plus returns, every single time for the past 90 years.
The sentiment at year-end was very negative, which is a good contrarian indicator. Typically, the average forecast from Wall Street's top strategists predicts the S&P 500 climbing by about 10%, which is in line with historical averages. This time around, the pros are unusually cautious, with most expecting the S&P to end 2023 lower. A Bank of America fund manager survey shows fund managers relative positioning of stocks versus bonds is the lowest level since 2009. Fund managers also hold the highest level of cash (5.9%) since the bursting of the technology bubble in 2000/01. The consensus view is that earnings have further to fall in 2023 and this remains a top investor concern. The market (buyside) tends to look out 6-12 months ahead of sell side analysts, and anticipates any earnings decline in advance of it actually happening. Earnings have historically bottomed after stocks bottomed. Since 1950, the trough in earnings growth lagged the bottom in the S&P 500 by about 6-7 months. Stock prices tend to inflect upwards before we see improvements in earnings, GDP, and employment. October 2022 may well have marked the lows in stock prices which has already discounted the fall in earnings ahead of sell side analysts. Looking ahead As we enter 2023, we think standing on the sidelines may pose a bigger risk than investing. Here's why. The US midterm elections The US midterm elections were held in November 2022. Historically, the S&P500 has outperformed the market in the 12-month period after a US midterm election with an average return of 16.3%, and not delivered a negative return during this period over the past 60 years. Inflation may still prove to be transitory Many argue that inflation will be much stickier than markets currently discount, and that it will take multiple years to restore price stability (2% inflation). However, we continue to believe that the outbreak of inflation is squarely the result of the pandemic shock. As the pandemic-related economic dislocation renormalizes and the Federal Reserve continues to tighten monetary policy, inflation may well eventually fall back to pre-pandemic norms. An area of additional concern, as a result of the pandemic, has been the reduction in the labour market participation rate. This has the potential to drive sustained increase in wages inflation and lower levels of productivity. We are today living in the golden age of technology and innovation which we continue to consider to be deflationary for two primary reasons: 1. Technology reduces the demand for labour, which puts downward pressure on wages and employment levels, which in turn reduces demand for goods and services because workers have less money to spend 2. Technological innovation also leads to automation, tools that make workers more efficient, and the elimination of some job roles So where are the opportunities? We have found that the long-term cash flows and valuation of companies exposed to megatrends do not change as a result of an increase in interest rates, or a slowdown in the global economy. Megatrends are unstoppable long-term growth trends with profitable industry structures. Here's just one example. The 60+ age cohort is set to more than double to 2.1 billion by 2050. This is what we call a demographics megatrend. The fastest ageing group within this cohort is those aged 70-75 and this is where we have identified prime investing opportunities. As the population ages, so does the incidence of chronic disease. Older people also often suffer from multiple chronic conditions at the same time. The second leading cause of death within those aged 70-75, after heart disease, is cancer. The demand for companies providing cancer drugs is not reduced by changes in interest rates, inflation, or recession. These factors also do not change the trajectory of ageing populations, nor the increasing demand for solutions for chronic diseases. Current volatile market conditions provide opportunities to invest in highly profitable businesses benefitting from megatrends at lower prices. Funds operated by this manager: Insync Global Capital Aware Fund, Insync Global Quality Equity Fund Disclaimer |
27 Jan 2023 - Hedge Clippings |27 January 2023
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Hedge Clippings | Friday, 27 January 2023 In case you're still basking on the beach (or wherever) in blissful ignorance, Australia's December quarter inflation figure came in higher than expectations at 7.8%. Of course, if you ARE still away, you may also not be spending your Friday afternoon reading Hedge Clippings, but either way, it seems like RBA Governor Philip Lowe's New Year is going to start off being as difficult as his old one, although he'll no doubt be considerably more careful with his longer term forecasts than last year. The bottom line is that we suspect inflation is likely to stay stronger for longer, disappointing the optimists who were expecting it to peak early in the new year under the influence of last year's sharp rate rises. Thus, given the RBA's, and their offshore colleagues' previous perilous prognostications (try saying that quickly after a glass or three of Friday's lunchtime vino) that inflation can't and must not be allowed to become entrenched, there's going to be more pain in the form of rate rises, most likely when the RBA board gets together for the first time next Tuesday week. Early reports suggest some leading bank economists are predicting only one more rate rise, but the futures market is indicating at least two more, with no easing in sight until 2024 at least. So with the RBA's official rate currently sitting at 3.1%, and a 100% market probability of another 0.25% in February, we could see rates at 3.8% sometime in the June quarter. The consecutive rate increases totaling 3% in 2022 were the sharpest/fastest in most memories, so another 50 to 75 bps will put the icing even on that. The problem is that consumer spending hasn't changed significantly to have had an impact on inflation, and as yet, whilst there's obviously some stress in the housing market and in mortgage land, the flow-on effects that Philip Lowe is looking for haven't occurred. Of particular worry will be the fact that whilst last year's inflationary spike was primarily imported, unavoidable, or externally generated, (floods, oil, supply chain, Ukraine etc) there's the risk that home-grown inflation from wages pressure in a tight post-COVID labour market takes over. The theme of many of last year's editions of "Hedge Clippings" was interest rates and inflation, so it looks as if this year's shaping up the same way. Ditto Ukraine, which sadly doesn't look like ending quickly. Meanwhile, it does (hopefully) seem that the focus on the hard done by, but over-privileged whinger from Montecito has faded, although possibly only until his next issue - likely to be not getting a front row seat at the Coronation. Next week we'll publish the Australian Fund Monitors Review of fund and sector performances for 2022. In the meantime, we can recommend the four part documentary series on Bernie Madoff currently showing on Netflix. Or if you want something less serious, but no less enjoyable, try "Slow Horses" on Apple TV. Both are variously both more educational or entertaining than the six part Netflix saga of Harry and Meghan. That's it - the last time we mention them. (Promise). |
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News & Insights Outlook Snapshot | Cyan Investment Management 10k Words | Equitable Investors December 2022 Performance News Insync Global Capital Aware Fund Bennelong Australian Equities Fund Bennelong Concentrated Australian Equities Fund Skerryvore Global Emerging Markets All-Cap Equity Fund |
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