Equity markets began the year with considerable appreciations. Slightly better-than-expected and progressively improving inflation data reduced the likelihood that the central banks would apply more restrictive monetary policies. This, coupled with the re-launch of activity in China, boosted both shares and fixed-income assets.
Fourth quarter GDP data from the US confirms the strength of the world’s leading economy. Spending remains strong, driven by services, which grew by more than 3%. Inventories are another factor contributing to the boost in Q4 ‘22 GDP. The labour market, for its part, continues to deliver upside surprises, with salaries gradually easing. Inflation, meanwhile, slowed for the sixth consecutive month and speculation about a severe recession is receding.
January saw better-than-expected economic data in Europe, with increased confidence among German business owners (IFO), higher retail sales in November and December, an upswing in European consumer confidence, and PMIs entering growth territory (above 50). Though still elevated, inflation has slowed significantly in the last three months, prompting markets to take into account the central banks’ less aggressive approach to potential interest-rate hikes. Falling energy prices further indicate a forthcoming decline in inflation.
In this context, EDM Strategy closed the month with gains of +7.96% vs. an uptick of +6.79% for the MSCI Europe NR.
For the market on the whole, it is worth noting the appreciation of sectors like tech, travel and leisure (benefitting from the re-opening of the Chinese market after lifting its “Zero COVID” policy), and finance. Sectors lagging behind include oil and energy, as well as other defensive industries like food and healthcare.
The top contributors to the fund’s performance in January were those in the travel, luxury (IHG and LVMH) and tech sectors (ASML, ASMI, Infineon), which not only benefitted from more moderate monetary policy forecasts, but which also posted results well above expectations.
ASM International surprised the market with the pre-publication of Q4 ’22 sales that exceeded forecasts by 12%, with margins outperforming the consensus by 50bps, and EBIT 15% above the consensus. More importantly, the orders booked in the quarter beat expectations by 19%. The company cited healthy demand and the gradual improvement of supply chain conditions.
ASML likewise posted slightly better-than-expected Q4 ‘22 results. The most pertinent data point referred to the contracting of new machinery (to be delivered over the next 18 months), which reached EUR 6.3bn, an increase of 29% y-o-y. This healthy order book enabled the company to release very positive 2023 guidances, indicating an elevated degree of confidence: sales growth of more than +25% y-o-y. Market consensus is roughly +19.5%.
Infineon, meanwhile, also published results and 2023 guidances well above projections, suggesting strength and buoyancy in the semiconductor market for the industry and automotive segments, niches where Infineon is the clear market leader. These messages are far removed from those of the most pessimistic analysts, who predict a collapse in demand this year.
In the luxury segment, LVMH performed particularly well, posting very strong sales results (Q4 +9% organic, +34% vs. pre-Covid). That said, margins remained at 2021 levels due to a sharp increase in advertising and marketing investment at a time of great opportunity given the re-opening of the Chinese market.
Among the detractors this month were the more defensive companies in the pharmaceutical and consumer staples sectors. Diageo published results largely in line with projections; however, the market reacted negatively to indications of slower growth in the US (+3%). Nevertheless, the company reiterated its medium-term guidance (organic growth of 5-7% between 2023 and 2025).
The companies in the portfolio are posting very good 2022 results with highly resilient profits. After a year in which we saw a major disconnect between company share prices and fundamentals, the market is once again rewarding the quality of our range of companies and the fund appreciated considerably in January. We remain confident that, over the medium and long term, share prices will be driven by profit growth, and therefore we believe there is a clear opportunity for investment in quality companies; the decoupling of price from profit will rectify itself which, in our opinion, will lead investors to obtain very attractive returns in the future, as occurred in January.
RICARDO VIDAL
Chief Investment Officer
