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Global Leaders Equity Fund: May 2023

May had two dominant themes for equity investors, the debt ceiling and artificial intelligence. 

Chip company Nvidia reported a year-on-year quarterly earnings increase of 28% which was 19% ahead of consensus expectations. Driven by a huge demand for their artificial intelligence chips, management provided second quarter revenue guidance of $11bn, well ahead of market expectations of $7bn. This resulted in all companies with AI exposure continuing to rerate with investors excited around the future opportunity. Mass areas of application for artificial intelligence include contact centres, meeting transcriptions, public safety camera monitoring, medical imaging reviews, industrial inspection, transportation and aided driving, credit card fraud monitoring and website recommendation engines.

With a deadline fast approaching financial commentators focused on the US debt ceiling during May. The hard limit of the level of borrowing by the US government has been raised 78 times previously. Once again there was some nervousness around the potentially cataclysmic impact that would have resulted if no agreement was reached in Congress to raise the ceiling. This was in our view, unfounded given that Washington would then have had the ability to invoke Section 4 of the 14th constitutional amendment to ensure the validity of US public debt. In the end political agreement was reached to extend the ceiling to cover a two-year period, but only after month end. Overall, despite the positivity from artificial intelligence exposed stocks the FTSE All World Index declined 1.0% during May.

Debt ceiling discussions ought to be considered together with thoughts on the status of the USD as the world’s reserve currency. Historically all issuers of the world’s reserve currency have always struggled to cope with the ability to borrow cheaply, resulting in over indebtedness and eventually major devaluation. Most recently Britain (1815-1920), France (1720-1815), the Netherlands (1640- 1720), Spain (1530 – 1640) and Portugal (1450-1530). The US Dollar is now close to the historical average period of being the world’s reserve currency. For now, at least, the United States remains an attractive and innovative economy. A credible alternative has yet to emerge. China continues to internationalise the renminbi however both the West’s distrust of communism and currency controls mean that it does not yet threaten the dollar.

The Global Leaders Fund (I class USD) fell 1.2%. Amazon (+14.4%), Alphabet (+14.0%) and TSMC (+11.1%) shares were the top performers - all beneficiaries of Artificial Intelligence. More disappointingly, despite encouraging results Paypal shares continued to decline falling 18.4%, Kering failed to deliver the growth of other luxury peers falling 15.6% and energy services company Schlumberger also saw their shares fall 13.2% with declining hydrocarbon prices.

Trading activity in the month was limited.

After month end political agreement was reached on the debt ceiling and markets rallied. Inflationary pressures continue to abate. Market expectations are therefore increasingly that the central banks are positioned to provide more accommodative monetary policy.