Global equity returns continued to be positive in December with the FTSE All World index (USD) climbing +4.8%. Inflation fell faster than expected in several western economies. This has heightened expectations for rapid cuts to central banks’ interest rates during 2024. Mid-month the Federal Reserve’s own policy projections indicated substantial rate cuts to come. With the global Index now just 4% below the all-time end of 2021 high, the fears of “higher for longer” that surrounded the market sell off in the summer seem long forgotten.

The equity market rally has been relatively narrow and dominated by a handful of technology companies. These firms generally continue to enjoy increasing growth forecasts. Such growth is becoming increasingly tricky to find.

One area of the global equity market that has been left behind generally is China. The knock-on impacts of the property sector bust on the domestic economy are relatively well understood. What international investors continue to struggle with, is the gauntlet of regulations and a changing operating environment for companies. A further unanticipated change occurred during December when the country introduced more stringent rules for online gaming companies.  As we wrote last time, multiples are generally low in the country and international investors are generally very underweight in the region. Both, historically, change rapidly once confidence returns.

During the month, the Ashburton Global Leaders Equity Fund (I class USD) returned +4.3%. The best performing stocks held were NXP Semi (+13.1%), Charles Schwab (+12.2%), and Siemens (+11.8%). While the worst were Taiwan Semiconductor Manufacturing Company (TSMC) (-2.6%), Haliburton (-1.9%) and Ping An (-1.8%).

During the month the position in TSMC was sold and a new position established in Nvidia. Imminent elections in Taiwan have the potential to reignite fears of an unpeaceful reunification with China which would likely induce sizeable investment outflows from the region and consequent reductions in share prices. Putting aside the geopolitical risks of Taiwan, TSMC is a remarkable company and continues to be set to benefit from the increasing demands for the high-end chips. Only very few other companies can manufacture these and the fund continues to hold peer Samsung Electronics.

Nvidia shares were the best performing shares in the S&P500 last year. The share price  increased at a much lower rate than several operating metrics, such as profit. This has resulted in the shares now meeting our valuation criteria for the Global Leaders strategy. We believe that there remains a long runway for growth in demand of the chips that Nvidia designs to run Artificial Intelligence applications. The fund’s risk framework indicated to us that Nvidia now offers better risk reward characteristics than TSMC, as well as offering some increased diversification. Given the reliance of Nvidia on TSMC for their manufacturing we remain conscious of the underlying Taiwan risk being taken.

Positions in the energy service companies were also reduced. While we anticipate that the demand for services will remain elevated, we are conscious of the sensitivity of the share price to the oil price and sentiment. These equities typically exhibit much more price volatility than is justified by their fundamentals and this appeared a good opportunity to reduce weightings in search of better risk reward opportunities.

2024 will be another huge year for geopolitics, with a record number of elections being held globally. Inflation remains among the most important variables for investors to watch given it tends to drive the central bank decision makers who raise or lower global liquidity levels, which affect investment markets. We continue to look for reasonably priced high-quality companies who are compounding their intrinsic value.