Global Leaders Equity Fund: February 2024

19 March 2024

February 2024 saw the global equity market continue its recent pattern with share price momentum and companies with higher growth rates providing better performance. Index returns continue to be driven by the narrow number of companies delivering great earnings growth.

Overall financial conditions in the United States have not changed much despite headline tightening. Volatility has remained surprisingly low. Investors appear to envision that pro-business policies will emerge from a new Republican Government, despite the lack of tangible policy proposals. There have been announcements from large technology firms about layoffs, but they represent a small fraction of overall employment which in aggregate has continued to be buoyant.

The FTSE All World Index (USD) gained 4.3%, while the Global Leaders Fund (I class USD) delivered 4.6%. The best performing stocks held were Nvidia 28.6%, NXP Semiconductors 18.6% and Eaton 17.4%. Market expectations for Nvidia’s fourth quarter results were very high. Nvidia delivered a spectacular showing of 265% year-on-year revenue growth and 486% adjusted earnings growth (765% on GAAP earnings). This was well over 10% higher than consensus and extremely positive guidance was provided. Large technology powered companies are tooling themselves up to deliver the processing power required to support the huge increase in demand for Artificial Intelligence (AI), particularly generative AI.

NXP, another semiconductor fund holding that focuses on simpler chips, provided a positive earnings update and their shares benefited from an increase in broker sentiment and upgrades. The firm indicates that there is modest inventory with customers, and it is becoming increasingly clear that the amount of content that they supply per vehicle is increasing.

The Eaton share price continued to climb following the positive earnings announcement in January. Increasingly it is becoming better understood that to decarbonise increased electrical grid connections are required, and third-party reports indicate that the US power grid requires substantial investment and upgrades.

There were few negatives on the performance front, and these came from the more defensive sectors. The most disappointing performance came from the consumer staples holdings Nestle declining 9.3% and Reckitt Benckiser down 13% due to only modest volume growth. There are fears that negative real earnings growth, as inflation has outstripped wage growth, is leading consumers to tighten their belts. Reckitt’s results were also impacted by accounting for a one-off overstatement of £55m of revenue in their Middle Eastern business in 2023 due to “inappropriate actions of a small group of employees”.  The company indicates an expectation of inflationary pressure easing as they look forward, which should be more positive. The AstraZeneca share price declined after earnings were lower than expected due to increased costs. Towards the end of the month, a positive phase three trial data for Tagrisso showed a decrease in disease progression for patients with advanced lung cancer. Shares recovered somewhat and we continue to see the company offer a compelling opportunity given its de-risked growth prospects.

With the current market so narrow active global equity managers seem to be in one of two camps; either they have AI exposed stocks and are outperforming or keeping up with the global index, or they have little of these and are experiencing underperformance. Amid the areas of the market that seem obvious to avoid, such as US regional banks, we are conscious that opportunities might arise. However, we are unconvinced that this is the right time to take risk in these areas.