September, 2023
We initiated a position in Inditex late in September. Inditex is the leading global apparel firm outside of the sporting goods space. The company has 5,700 stores across 93 countries with 73% of sales from the Zara brand. The company has long been widely appreciated for its unique business model which is based on a rapidly refreshed product assortment supported by a highly responsive and proximate supply chain. Inditex was initially slow to embrace ecommerce but shifted strategy around 2016, and in 2022 ecommerce accounted for 24% of sales with profitability commensurate with physical stores. After a long period of heavy investment in its ecommerce capabilities and a rationalisation of the store base, we view the company as well positioned to grow at a sustained pace with room for expansion in Northern Europe, the Middle East and the US.
There were no fully closed position during the period.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-24.pdfAugust, 2023
There were no newly opened or fully closed positions in the period.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-23.pdfJuly, 2023
We closed our position in Disney in July. We closed our position in Disney during the period after taking a more negative overall view on the direction and economics of the company’s transition from linear TV to content delivered increasingly through Disney+, the company’s OTT streaming service launched in late 2019. While the early magnitude of Disney+ success was accretive to revenue as the pandemic accelerated streaming adoption, we have developed a more negative long-term view regarding the terminal profitability of this business, particularly relative to the company’s Linear Networks segment, its largest profit pool. While we continue to recognize the powerful network effects of streaming in combination with Disney’s experiences and Parks business, we have decided to close our position as we view more attractive long-term opportunities in the media and entertainment space.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-1-3.pdfJune, 2023
We opened a new position in Universal in June and fully closed our position in Dollar Tree.
We opened a new position in Universal Music Group, UMG, in June. UMG is the largest music entertainment company in the world with more than 30% market share. While the history of the music industry has seen volatility, the current secular shift toward streaming and digital technologies is reinvigorating growth, which creates new opportunities for artists and music companies to monetise on increasing consumption. In an increasingly competitive entertainment environment, we believe music’s uniquely enduring and long-lasting popularity will drive compounding value over the longterm, and UMG is the best positioned company to capitalise on those trends.
We closed the position in Dollar Tree late in the quarter after holding the name since early 2021. The initial benefits of the move away from the single price of $1 at the Dollar Tree banner have been realised. We increasingly believe that management’s attention is too focussed on Family Dollar, the chain acquired in 2013, which has been a major drag on the business for most of the time since. While a turnaround would certainly be accretive to earnings, if this comes at the expense of performance at the much higher margin Dollar Tree banner, the overall result would not be positive.
After attending the company’s investor day we see an increased risk that the Dollar Tree banner may not be getting the attention it needs.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-22.pdfMay, 2023
There were no newly opened or fully closed positions in May.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-21.pdfApril, 2023
There were no newly opened or fully closed positions in April.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-20.pdfFebruary, 2023
There were no newly opened or fully closed positions in February.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-19.pdfJanuary, 2023
We opened one new position Equifax in January.
In January, we initiated an investment in Equifax, a leading consumer data and analytics provider. Equifax is one of three global credit bureaus, an oligopolistic industry with high barriers to entry benefitting from secular demand trends for increased data, analytics and insights. Equifax also has a differentiated employment data asset, with a monopoly type competitive position and significant growth opportunities through penetration, pricing, product enhancements and new verticals/use cases. Following the well-publicised data breach in 2017, an impressive new management team has been installed who have spent $1.5bn upgrading to a best in class, fully cloud native technology system, which improves security, reduces costs and accelerates product development, in addition to a well executed bolt-on M&A to enhance existing offerings and add faster growing verticals. We have been following Equifax for several years but have been waiting to enter at the optimal point in the US mortgage market cycle, with 20-30% of group revenues sensitive to origination volumes. We were reluctant to invest during the temporary boom driven by falling rates post covid, since this appeared to be over-extrapolated, and then held back last year amid uncertainty regarding where and when the mortgage market would bottom, as rates moved up significantly. With mortgage rates now seeming to have peaked, origination volumes appear likely to trough in the coming quarters, leading us to initiate our investment at an attractive price ahead of a likely acceleration in revenue growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-18.pdfDecember, 2022
We opened one new position Shisedio in December.
In December, we opened a new position in Shiseido, Japan's leading beauty company and the 3rd largest player globally. Shiseido's business is highly concentrated in Asia, and thus we believe it is positioned well to rebound with the reopening in Japan and China. Specifically, Chinese domestic and travel retail account for 40%+ of Shiseido's sales, and China reopening starting from November 2022 has set up a better environment for consumer spending in 2023. Additionally, Japan inbound started to recover in Q322 as Japan reopened in October. With 90% of inbound sales previously from China, we believe Chinese travellers will gradually increase in 2023 after the peak of Covid infections. Lastly, the Japanese domestic market started to recover in Q322 amid the revamped Elixier brand. In addition to the reopening, we continue to view the company favourably given the business restructuring underway whereby Shiseido has focused on its strengths with 80% of sales coming from premium skincare in Asia, a market with very solid long-term growth potential.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-17.pdfNovember, 2022
During November, we opened one new position, Novo Nordisk, and closed two positions, Adidas, and Fidelity National Information Services.
Novo Nordisk is the world’s largest manufacturer of drugs for the treatment of diabetes. Novo is seeing accelerating demand for its portfolio of GLP-1 products, which traditionally have been used as second or third line drugs. This demand is being driven by new treatment guidelines which suggest the use of these products much earlier on in the treatment paradigm. Importantly, recent innovations in GLP-1 have improved the weight loss profile of these drugs, allowing for their approval in obesity, a large assessable market that often overlaps with T2D. Novo’s product, Wegovy, was actually approved in 2021. However, overwhelming demand led to a shortage of the product, requiring Novo to pause its launch as it ramps up manufacturing capacity. Novo is expected to formally relaunch the product in early 2023 (backed by more robust supply), which we believe will drive upside to current market expectations for the company’s highly profitable GLP-1 franchise. We are also optimistic that a steady stream of clinical data throughout 2023, including a cardiovascular outcomes trial for Wegovy in obese patients, will continue to improve the efficacy profile of Novo’s products whilst further emphasising the relevance and importance of treating obese and overweight patients pharmacologically.
With Adidas, we decided to step aside as we believe there are too many issues to resolve at the company at this time. We had owned the shares for several years but had sold out in 2021 before re-entering the name this May. We felt that many of the challenges facing the company were largely priced in. This was not the case as the company proceeded to cut guidance twice and then announced the termination of the partnership with Kanye West. We were anticipating some signs of improvement in China and a fairly resilient performance outside of China. We no longer see as much potential for a recovery in China as local consumers have moved on to domestic brands, while in North America and Europe, inventories have suddenly built up, compelling the company to discount heavily. Finally, the loss of the Yeezy franchise removes a high margin profit stream.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-16.pdfOctober, 2022
We opened one new position during October; Tokyo Electron. In October, we initiated a position in Tokyo Electron, a leading semiconductor equipment manufacturer based in Japan. We believe Tokyo Electron to be among the best positioned semiconductor equipment companies given its key position in the semiconductor manufacturing landscape. Tokyo Electron’s equipment is necessary to produce the most cutting-edge technology, with every advanced semiconductor in the world at one point utilizing equipment manufactured by the company. In addition, its culture of innovation and responsible investment has created sustainable competitive advantages in its highly complex equipment, and driven key partnerships across the semiconductor value chain, cementing the company’s position within the broader semiconductor landscape. We purchased shares at a cyclelow valuation, as we believe Tokyo Electron is better positioned than its US-based semi-cap equipment peers given the company’s domicile in Japan and the ability to avoid the worst of the China/US trade escalations regarding the production of leading-edge semiconductors.
There were two fully closed positions during the month, Tencent and Applied Materials. We closed our Tencent position prior to China's 20th National Congress meeting due to its high uncertainty. Post the National Congress, the new 7-member Poliburo Standing Committee triggered a selloff of Chinese stocks as the leadership reshuffle reinforced General Secretary Xi's dominant power and suggested a potential delay of the China Reopening. With this new team, visibility into further economic stimulus plans is also low and we would like to wait for the December Poliburo meeting and next year's Two Sessions for more clarification on China's economic focus. We exited our position in Applied Materials during the period, following new restrictions enacted by the US government regarding semiconductor companies selling to and operating within China. While the initial impact appears manageable, given Applied Materials noted a $400M quarterly impact from the new restrictions, representing about 5% of total revenue, our view is that the new restrictions signal a material deterioration in relations between the two countries. Given the risk of escalating trade tensions, we view Applied Materials as particularly vulnerable given the company derives about 30% of its total revenue from the Chinese market. As a result, we have shifted capital from shares of Applied Materials to Tokyo Electron, a semi-cap equipment company benefitting from many of the same long-term tailwinds as Applied Materials, but insulated from the worst impacts of restrictions given its domicile in Japan.
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We opened one new position during September, Schlumerger Ltd.. As the largest oilfield services platform globally and a technology leader, Schlumberger is well positioned to benefit from increases in E&P capex spending in both North America (22% of sales) and internationally (78% of Sales). The five-year outlook for international is looking very strong, particularly offshore (41% of sales), which is Schlumberger’s core strength. Saudi Arabia, for example, plans to spend >US$35bn on E&P capex, with 80% focused on offshore. ADNOC (Abu Dhabi) and Petrobras also has huge investment programs for the next five years. These projects are comfortably economic at US$60/bbl (WTI), a price level that the EIA predicts will be exceeded beyond 2023. Profitability is also improving strongly as volumes return and tight market conditions support strong pricing. We therefore see strong upside to our price target of US$55.
There were no fully closed positions during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-14.pdfAugust, 2022
We opened a position in Haleon during the month. Haleon is the global leader in over-the-counter medications, vitamins/minerals/supplements (VMS) and therapeutic oral care. The company was spun out of GSK in July. Haleon is the largest and most focused consumer health company, operating in an industry with favourable premiumisation trends and a tailwind from ageing populations. While quite healthy already we see room for margin expansion over time as the company benefits from its scale. We decided to enter the name following a sell-off due to concerns over potential liabilities related to Zantac. While the potential liabilities create market uncertainty, we do not expect significant management distraction given the potential liability is indirect to Haleon with any sales of the product by predecessor companies in the distant past.
There were no fully closed positions during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-13.pdfJuly, 2022
There were no newly opened or fully closed positions in July.
Among the key financial market developments during July was a rapid and large decline in developed market bond yields. The US 10-year Treasury yield, which rose to 3.5% in June, has since declined almost a full percentage point. In Europe, the German 10-year bond has declined a similar amount from a lower base, dipping below 1% by month end.
This change has been accompanied by a continued softening of market expectations for inflation, and also strengthening expectations that the peak of the US rate hike cycle may be approaching, with US markets now pricing in a peak range for rates of 3.25-3.5% in December of this year (100 basis points above the current level), with rate cuts to follow in 2023.
Several factors, including rising recession fears and uncertainties relating to the ongoing war in Ukraine have contributed to these recent changes. However, when it comes to what matters most for Intermede's portfolio, namely the performance of our individual businesses, July saw generally robust financial results often greeted positively by a market that had clearly been expecting worse news.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-12.pdfJune, 2022
During June we closed one position, Toyota Industries.
Toyota Industries (TI) is a leading global supplier of Materials Handling equipment and a key automotive supplier to Toyota Motor (including compressors for AC). We started to sell out of our position in mid-May due to concerns about the Materials Handling segment and Automotive market. In terms of Materials Handling (~79% of EBIT), segment sales are split ~82:18 between the Forklift business and the Automated Systems business. Key competitors include Kion and Jungheinrich, which prior to the sale had seen their share prices approximately halve in USD terms versus TI’s - 20% YTD. Both German companies cut guidance at the time of the calendar first quarter results due mainly to cost pressures negatively impacting margins (which are not high in the Forklift business to begin with), particularly in relation to steel and electronics. Kion also commented that large warehouse automation projects are being pushed out, partly due to macro uncertainty and partly due to recent high capacity additions in the e-commerce market (driven by Covid). Given rising interest rates and other pressures on the consumer, we have also turned more bearish on the automotive market in the near term. Automotive parts (mainly AC compressors) and car assembly make up the bulk of TI’s remaining businesses. TI also holds 7.3% of Toyota Motor stock, the MTM value of which is approximately equal to TI’s market cap and the dividends from which represent ~30% of TI’s Profit before Tax. Toyota Motor guided down significantly on rising COGS after F4Q22 results and initiated FY23 guidance far below consensus. Furthermore, we do not expect a fast resolution to the supply chain constraints that are limiting the ramp up of light vehicle production, and light vehicle demand would be significantly impacted in a recession scenario.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-11.pdfMay, 2022
During the month of May we closed two positions and opened two positions. The positions we closed were Aptiv Plc and Apple Inc and the newly opened positions were Adidas AG and Microsoft Corp.
Aptiv is a Tier 1 auto supplier and leading provider of technology for Advanced Driver Assistance Systems (ADAS) and power distribution systems for Electric Vehicles. Although we continue to see compelling structural growth drivers behind electrification and autonomous driving, we believe that the environment for auto suppliers is now very challenging. On the demand side, the consumer is being pressured by rising interest rates and rising vehicle prices. On the supply side, Aptiv is continuing to face challenges in terms of supply chain (delays, shortages of components), compounded by China lockdowns, and raw material price inflation. Historically, passing on rising costs to large OEM customers has not been easy for tier 1 suppliers. Indeed, annual price-downs are generally the norm in the industry. Given these risks, we therefore decided to sell our position at the beginning of the month.
We closed our position in Apple during the month of May. Over the last three years and through the pandemic, Apple stock has enjoyed a substantial re-rating in the market (forward P/E multiples have risen from ~15x to the current ~25x), as the market now views the company as an ecosystem-driven services provider, rather than simply a hardware manufacturer. Apple has successfully complemented its technology leadership in hardware with new software and service offerings such as App Store, Apple Pay, Music, and TV, leveraging its large installed base of iOS devices to grow new higher margin, recurring revenue streams that fundamentally change the profile of earnings. That said, looking forward from here, we take more cautious view. Rising inflation and interest rates plus the potential for weakening global consumer spending are increasing risks, particularly for Apple given its high price and premium position in the electronics market. This orientation leaves the company marginally more vulnerable to low-cost alternatives or more users deciding to delay upgrade cycles in the face of pressure on household real incomes. Rising geopolitical uncertainty, highlighted by Russia and China, are also introducing incremental risk, manifest in continued challenges for the global technology supply chain. As such, we now see more limited upside potential in the stock and have decided to close our long-standing position.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-10.pdfApril, 2022
During the month of April there were no newly opened or closed positions
The first of these is the risk of stagflation, the unhappy combination of rising prices and falling growth, which history has shown can be harmful to asset prices. Inflation is currently pronounced (in the 30 richest economies globally OECD data shows prices rising at 7.7% year on year in the most recently available figures for February 2022, versus just 1.7% a year before), and growth fears are being driven by a number of factors.
These include the possible effects of a China slowdown driven by both lockdowns of major cities and fears regarding the property sector, potential renewed supply chain challenges relating to such efforts to contain Omicron, commodity price increases resulting from shortages due to the Russian invasion of Ukraine, and the aggressive increases being seen in US interest rates, with the 10 year bond hitting 3% and the 30 year mortgage rate now sitting over 5%, having doubled from the lows seen during 2021.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-9.pdfMarch, 2022
During March we closed three positions and opened three positions. The positions we closed were Meta Platforms, Alibaba and Diversey Holding, and the positions we opened were Weir Group PLC, Tencent and Autodesk Inc.
We closed our position in Meta (Facebook) during the quarter. While we continue to believe that Facebook will remain the global leader in social media, we have grown increasingly concerned that fundamental changes in the business landscape leave the company in a much more challenged position, and as such we do not believe growth will continue at similar rates as in the past. First, recent changes to Apple’s iOS platform that have increased privacy protections for users have made it more difficult for Facebook to deliver its targeted advertising on behalf of its clients. While management is confident that it can execute strategies to circumvent Apple’s changes this time around, we are concerned that the desire from users, society, and governments for more privacy and in turn less tracking and advertising will remain headwinds going forward. Second, the growth of TikTok as a competitive social media experience is beginning to show tangible impact, and challenges Facebook’s position of dominance across its portfolio of apps. Third, CEO Mark Zuckerberg’s full commitment to his vision of the metaverse brings new risks to the company. While he may ultimately be proven correct in the long-term, from today he is asking investors to stomach significant investment losses in the new venture with no sense of a business model or financial return in the long-term. Simultaneously, the strategic shift takes management attention away from the current core business that must navigate the digital advertising landscape coming out of the pandemic. In light of these challenges, it is clear that the underlying fundamental elements of our investment thesis on Meta have changed, and as such we have decided to re-allocate capital elsewhere.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-8.pdfFebruary, 2022
During the month of February there were no newly opened or closed positions.
The Russian invasion of Ukraine is the most significant military event in Europe since the Battle of Berlin in 1945, and the human cost, already appalling, appears likely to escalate as a faltering initial Russian advance solidifies into more sustained artillery bombardment of Ukrainian cities. The number of refugees that have fled the country now exceeds 1m and will continue to rise.
While it has been widely noted that Russian GDP equates to only 3% of the global total (less than half of California’s own GDP), and that following earlier sanctions in the wake of the 2014 Crimea invasion the Russian system was already partially isolated, the potential uncertainty introduced to global markets and economies by the invasion of Ukraine is more significant than this number would imply.
The remarkable unanimity, speed and severity of financial sanctions against Russia and its prominent wealthy citizens have seen the Russian stock market closed since the invasion, the secondary sovereign debt market severely sanctioned, much of the country’s US$630bn of reserves rendered inaccessible by a freeze on the Bank of Russia’s assets, the Nord Stream 2 pipeline cancelled, Russia’s ability to transact in foreign currencies limited by the EU, US and other G7 partners, and prominent Russian banks removed from the Swift payments network. The rouble fell more than 30% against the US dollar on the first full trading day after the invasion, leaving it worth less than US$0.01.
Among many examples of rapid political action were Germany’s immediate decisions to create a €100bn fund for defence investments, to enact a permanent increase of military spending to 2% of GDP annually (from 1.5% previously), and to undertake extensive donations of anti-tank and anti-aircraft armaments to the Ukrainian cause.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-7.pdfJanuary, 2022
During the month of January, we closed one position and opened one position. The position we closed was Bio-Rad Laboratories and the newly opened position was Techtronic Industries Co Ltd.
We closed out the position in Bio-Rad during January as our Bio-Rad thesis was based on margin expansion and the growth of the digital PCR business. Over the period of ownership, margins have gone from HSD to low twenties, and we feel that the vast majority of this margin opportunity has already been captured. Additionally, whilst Bio-Rad has a leading position in digital PCR, emerging competition from ThermoFisher and Qiagen could slow growth rates going forward. On this basis, we decided to sell our position in Bio-Rad to fund the purchase of Techtronic, where we have more conviction in future outperformance.
We opened a new position in Techtronic Industries during January. Techtronic Industries (“TTI”) is a leading global manufacturer of cordless power tools (e.g. hand held drills, cutting tools, sanders etc). Brands include Milwaukee and Ryobi. The market is dominated by seven major players (TTI is #2 after Stanley Black & Decker) and TTI is leading the pack in terms of innovation and product development. TTI is growing by gaining share and expanding total addressable market. TTI’s Power Tools market share is currently ~10% but this is increasing (by ~0.5 ppts p.a.) and half of the market is very fragmented. Furthermore, TTI is now introducing higher horsepower battery-powered equipment that can replace tools in the Construction Equipment market, which is worth US$146bn p.a. (vs $62bn Power Tools market, growing at 4-5% p.a.). President Biden’s recently signed US$1.2tn infrastructure package should act as a multi-year demand catalyst for construction tools, which is beneficial for TTI’s Milwaukee brand (~60% of overall sales). Combined with further scope to expand operating margins, this is driving strong growth in earnings. We are forecasting Revenue and EBITDA CAGR of 14% and 17%, respectively, over the next three years, which brings EV/EBITDA down to 12x in FY24E. At the time of purchase in January, we had +49% upside to our price target of HKD205.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-6.pdfDecember, 2021
During the month of December there were no newly opened or closed positions
December saw the Federal Reserve respond to the highest US CPI increase since the Volcker era in 1982 (6.8% year on year for November) by accelerating the end of asset purchase tapering to March (from the previous target of June). The decline in the pace of monthly purchases of treasuries and mortgage backed securities will double to US$30bn from January, leaving the Fed scheduled to purchase US$60bn in the monthly period commencing in January (purchasing periods are measured from mid-month), US$30bn in the period commencing in February, and nothing thereafter
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-5.pdfNovember, 2021
During the month of November there were no newly opened or closed positions.
November was a busy news month, with the detection of the Omicron COVID variant leading to swift imposition of new travel curbs, further evidence emerging of pockets of stubborn inflation around the world, and Jerome Powell both being renominated to the Fed chair mid-month, and formally retiring the word ‘transitory’ from Fed discussions of inflation on the last day of the month. Nevertheless, even after declines driven by the prospect of an early Fed rate rise and uncertainty about vaccine efficacy against Omicron, by month end major equity indices continued to sit fairly close to the all-time highs that were hit repeatedly during the month.
It is therefore worth digging into the market data, as there are some interesting patterns below the surface. Firstly, in what has been a fertile period for IPOs, half of the 49 companies that raised more than US$1bn at IPO this year are trading below their listing prices, despite broad equity market conditions that have been healthy (the S&P500 is up ~24% year-to-date, for example).
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-1-2.pdfOctober, 2021
During the month of October, we closed one position and opened one position. The position we closed was Match Group and the newly opened position was Applied Materials. We closed our position in Match during October after a period of outperformance where the shares reached our internal price target. The company is now seeing a recovery in its business as users are returning to normal use of its dating apps, as reflected in subscriber and ARPU trends. Additionally, the stock is benefiting from market expectations that the fee rate that Match pays to its app distribution partners (largely Apple and Google) will be reduced going forward, which will translate to a direct boost to gross margins. Given the positive signals, the share price rose to levels where we saw limited remaining upside opportunity at market valuation, and we have decided to reallocate capital to other opportunities.
We opened a new position in Applied Materials during October. Applied Materials is a global leading supplier of manufacturing equipment for the semiconductor industry, with a diversified portfolio of products that serve a range of functions across the manufacturing process. The company is a key enabler to the production of evermore powerful and power efficient semiconductors, which are the critical building blocks required by the broader technology industry to deliver new digital services such as cloud computing, artificial intelligence, mobile computing, and Internet of things. Given the accelerating adoption for such services, we expect the company to benefit from sustained demand for its equipment from all around the world.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-4.pdfSeptember, 2021
During the month of September there were no newly opened or closed positions. September was a muted period for markets, with sharp declines seen across global equity indices in the closing days of the third quarter of 2021. Energy prices and long-term market interest rates have risen sharply, and the financial press notes the widespread emergence of inflation data that looks unprecedented in the recent period. For example, this week’s editions of the Financial Times alone have featured separate stories on alarming US, German and Turkish inflation. With google searches for the term ‘stagflation’ (meaning a period of tepid growth accompanied by troublesome inflation) in the UK running at ten times their most recent peak in 2008, investors could be forgiven for adopting a negative stance. However, a large part of our job at Intermede is to resist (to the extent that is appropriate) the emotional pull of attention-grabbing headlines, and to adopt a longer-term view. In which case, a review of the health of both household and corporate finances might provide a useful sense check to the negativity of certain news stories (to do this requires reference to aggregate level data, so please excuse a more ‘top-down’ feel than usual to this month’s commentary).
First, after the pandemic period, household and corporate balance sheets are both looking extremely healthy. Measured as a percentage of GDP, US corporate cash balances currently stand at 17.2%. This is a decline from the extraordinary peak of 21.1% seen after the second quarter of 2020, but still substantially above the previous all-time peak of 14.5% seen in 1949. US household balance sheets are also looking very strong, with the steady upward trajectory of aggregate savings seen since 2002 (broken only by a brief acceleration of saving caused by the GFC) shooting skywards after the onset of the pandemic, with an additional US$3.3trn of savings added (relative to trend) to take total savings to US$17.2trn since March 2020, according to Longview Economics. It appears farfetched that a widespread lack of demand could take hold in a period in which both households and businesses have unprecedented levels of ‘dry powder’ ready to spend
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-1-1.pdfAugust, 2021
During the month of August there were no newly opened or closed positions
Global equities had a strong month during August despite the tumultuous events in Afghanistan (which the market does not appear to have regarded as financially significant), with the MSCI ACWI rising over 2%, and with the S&P 500 recording its seventh successive month of gains. The eyes of much of the world were on Japan during the month, where Olympic athletes competed in empty stadiums due to ongoing spread of the Delta COVID variant. We note an interesting statistical quirk driven by the recent strength in US equities, which is that, for the first time, four US businesses - Apple, Amazon, Google and Facebook (all of which are current holdings for Intermede’s clients) - now exceed in their collective market capitalisation of over US$7tn the entire valuation of the 190 companies listed on the main board of the Tokyo Stock Exchange.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-3.pdfJuly, 2021
July was a positive month for equities, with mega-cap US tech companies in particular reporting strong growth in revenues and profitability. Taking one example from the global portfolio, Facebook doubled its net income for the second quarter on a year-on-year basis, to US$10.4bn, driven by rapidly rising advertising revenues. Portfolio positions Apple and Alphabet also reported record quarterly profits of US$21.7bn and US$18.5bn respectively. Such extraordinary expansion of the ‘E’ that functions as the denominator in the ‘P/E ratio’ is perhaps instructive of the potential risk of overfocusing on short term valuation multiples when assessing high growth businesses with strong competitive positions.
Elsewhere, two themes dominated the market during July, namely inflation and the continuing regulatory focus on certain business sectors in China. We are in no doubt that investors will be reading significant volumes of commentary on both issues from their investment managers, so for this month at least we will limit our focus to China.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-2.pdfMay, 2021
During the month of May we opened one new position, namely Toyota Industries, and closed one existing position, Adidas AG. Toyota Industries’ two main operating businesses are exposed to compelling structural growth drivers in the form of e-commerce, automation and electric vehicles. The Materials Handling business (79% of EBIT) is the global #1 in forklifts, including e-forklifts, and #3 player in Warehouse and Distribution Centre Automation (i.e. a beneficiary of e-commerce growth and the shift to lowemission battery operated equipment). TICO is also the global #1 in compressors for automotive AC systems (~8% of EBIT), of which 20% of which are for electric vehicles and expected to grow at a 38% CAGR over the next five years.
Overall, we are forecasting 7% medium-term organic growth post-COVID, and also see good potential for margin expansion from pricing, mix, volume and operating efficiencies. Toyota Industries was the original holding company in the Toyota Group and holds shares in a number of group companies, including ~7% of Toyota Motor.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report-1.pdfDecember, 2020
During the month of December we did not open any new positions or close any existing positions within the portfolio. While Intermede’s investment approach is firmly grounded in detailed fundamental analysis of individual businesses, it is important that we remain aware of the large-scale macroeconomic forces that, to some extent, define the nature of the environment in which our portfolio businesses operate.
The closing months of 2020, a year in which the COVID-19 pandemic has demanded an unprecedented level of fiscal and monetary policy response from nations globally, seem a particularly opportune time to take stock of these. A useful first step is to quantify the sheer scale of government financial responses to the pandemic. The greatest increase in sovereign debt (in both absolute and per capita terms) was seen in the United States, where the government debt burden rose by US$4.2tn in 2020, an increase amounting to approximately US$12,500 per capita, according to the IMF. The remaining G7 nations (Canada, France, Germany, Italy, Japan and the UK) collectively added an additional US$3.9tn, or approximately US$8,060 per capita.
As a result of this unprecedented level of borrowing, net government debt as a percentage of GDP has now risen to 177%, 107%, 98% and 85% respectively in Japan, the United States, the UK and the Eurozone, a peacetime high in each case. A second area of focus, given the substantial role that central banks have played in monetising government debt during 2020, is the rapidly converging relationship between fiscal and monetary policy. Taking the United States as a case study, the US fiscal deficit expressed as a percentage of total government expenditure (which stood at around 10% as recently as 2016) exploded to approximately 50% in 2020. The depth of the Federal Reserve’s role as an enabler of this debtdriven spending is demonstrated by the scale of the central bank’s purchasing of US treasuries during 2020, which peaked at a level equivalent to almost 40% of government expenditure.
From a portfolio perspective, the clear risk during such a period of extreme monetary and fiscal looseness to a portfolio of longer-duration assets such as growth equities is that a V-shaped recovery (perhaps driven by pent up demand following a successful roll out of COVID-19 vaccination programs) forces monetary authorities to pivot unexpectedly to tighten policy, with the knock-on effect that long-dated cash flows are discounted more aggressively with potentially severe impacts on share prices.
The most salient recent example of the effects of such a policy pivot is perhaps the ‘taper tantrum’ of 2013, which saw equities impacted in a sharply negative fashion as bond yields rose. However, while we are not in the business of making macroeconomic forecasts at Intermede, certain features of the current landscape suggest that the risks of such a sharp reversal are modest at present. Firstly, the current priorities of the Fed relating to inflation targeting would not be supported by a move to tighten.
Following a strategic review conducted between February 2019 and August 2020, the Fed has indicated that it will target an average inflation rate of 2%, with rates in excess of that level to be tolerated to compensate for periods of lower inflation. With the Fed’s preferred measure PCE Index (Personal Consumption Expenditures inflation) running at around just 1.4% in November 2020, tightening measures would run contrary to these stated strategic goals.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/intermede_global_equities_fund_investment_report.pdfasset_class: Foreign Equity
asset_category: Large Blend - Fundamental
peer_benchmark: Foreign Equity - Large Fundamental Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: PPL0036AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.mlcam.com.au/our-investment-managers/intermede-investment-partners/performance
Click on the Fund Name it will lead you to the Monthly report.
in the PDF==> Grab the Portfolio Review
fund_features:
Intermede Global Equities Fund aims to deliver a return that exceeds the Benchmark (before fees) over 7 year periods. Intermede engages in intensive research to identify investment opportunities in mid and large capitalisation companies and across developed and emerging markets.
- The Fund is a concentrated portfolio of approximately 40-50 companies.
- Intermede’s investment philosophy is that companies with good management and strong market positions in attractive industries will outperform if their shares are bought at the right price.
structure: Managed Fund