Artemis Global Select Fund update

Source for all information: Artemis as at 31 December 2024, unless otherwise stated.

Review of the quarter to 31 December 2024

It seemed like a return to business as usual for the US in the fourth quarter of 2024 as Donald Trump’s victory in the presidential election led to a market rally. We were encouraged to see the gains spread beyond the tech stalwarts and into more domestically focused sectors such as housing, a theme we expect to continue into 2025.

There wasn’t such good news for other regions, however – the threat of import tariffs contributed to a pullback in the Chinese market, which had made strong gains in Q3 on the back of plans for government stimulus. Ultimately, we believe this threat may be overstated and that China has significant scope to surprise going into 2025.

Europe continued to struggle economically and a near-term recovery looks optimistic. Some of the issues it faces may be more structural than cyclical as automakers and some industrial companies face increased competition from China and energy costs remain volatile. A weak political environment doesn't help.

Against this backdrop, the fund returned 2.7%, compared with gains of 6.0% from its MSCI AC World index benchmark.

Negatives

Following the departure of its chief executive in October, Davide Campari reported worse-than-expected Q3 results, mainly due to a combination of one-offs such as wholesaler destocking in Italy, poor weather across Europe and consequent margin compression. We do not believe these factors affect the company’s long-term prospects and note its stock is trading at its cheapest level for a decade.

Q3 results indicated persistent pressure in Elevance's Medicaid business which was inconsistent with elevated market expectations for mid-teens earnings growth in 2025. Although the valuation is at a discount to peers, we are concerned that Elevance does not have as many self-help levers to protect profitability as competitors with greater scale. We sold out.

Novo Nordisk released trial results for CagriSema, its next-generation weight-loss drug after Wegovy. These disappointed the market, with weight loss not meeting the expected level. We believe the results are still meaningful and may have been affected by the consistency of use among the trial group. The GLP-1 (drugs that can help manage Type 2 diabetes and obesity) market remains a duopoly between Novo and Eli Lilly, and we believe that the initial share price reaction was overdone in the context of the opportunity.

Although Keyence delivered Q3 results ahead of factory automation peers, the market continues to question the strength of any recovery in demand. Nevertheless, good fundamentals through a downturn and average valuations near a cyclical bottom keep us invested.

Not owning Tesla, Alphabet or Broadcom also worked against us as these stocks rallied.

Positives

Amazon performed well on better-than-expected Q3 retail margins and issued upbeat holiday sales guidance for Q4. It also noted that 80 to 85% of global retail is still conducted via physical stores, where the growth runway for the next two decades remains immense.

Fiserv, a provider of financial services technology, released strong results in October, demonstrating consistency in earnings and growth in its Clover payments system. A Trump presidency is also likely to be positive for small and medium businesses, which constitute a significant part of Fiserv’s customer base.

TSMC released a good set of results that demonstrated strength in leading-edge processes, allowing it to benefit from strong demand for semiconductors at attractive profit margins. Yet the stock continues to trade on a significant discount to peers.

Recent purchase American Express also got off to a strong start.

Purchases

We invested in American Express as we believe that with payments becoming more commoditised, consumers need a good reason to pick one method over another. High-income customers pick Amex because of its brand, reward benefits (funded by partners) and the ‘sunk cost’ of having paid a membership as you would for a service such as Amazon Prime. Meanwhile, card network revenues, membership and absolute spend per card continue to grow, while counterintuitively, a large increase in card fees as higher rewards kick in appears to be increasing usage.

We believe the strengthening ecosystem around Amex's network should be valued at a higher multiple and the lending side of the business at a premium to a bank. Earnings should also grow more quickly than historical levels. Our analysis suggests the potential upside is twice as much as the potential downside.

Another purchase, Vulcan Materials, is the largest supplier of construction materials in the US. Continued government spending – on projects such as hurricane repair and longer-term infrastructure – and a recovery in non-residential activity should support building activity, while the company is benefiting from enhanced operational efficiencies. We don’t believe either of these is reflected in the stock price.

We also bought positions in Wells Fargo and Otis. Having exited our position in bank Wells Fargo earlier in 2024, we felt the result of the US election offered enough of a catalyst to re-enter. Trump's agenda of deregulation is likely to benefit financials the most and, for Wells specifically, may accelerate the removal of its regulatory asset cap, allowing it to expand into a potentially stronger economic environment, justifying a higher multiple.

Otis manufactures, installs and services elevators and escalators. The manufacture and installation of new elevators is an oligopoly with only three to four large players. Nevertheless, Otis makes about 60% of revenues and 90% of operating profit from servicing contracts. Our investment thesis is based on the market’s misplaced focus on the downside from new equipment sales in China. These only account for a few per cent of net profit and have already suffered a major slowdown, so are unlikely to affect earnings from here. More importantly, the market underestimates the strength of the recurring revenue coming from its servicing segment. We believe the potential upside is three times higher than the potential downside.

Sales

We trimmed our active bet on toll-road operator VINCI on the heightened political risk of domestically exposed French equities and the absence of positive short-term catalysts.

A trip to China highlighted ongoing problems in Estée Lauder’s travel retail operations, so we sold out.

We sold airport operator Aena on strong performance and Uber on continued uncertainty on the robotaxi threat.

Outlook

The set-up going into 2025 should give markets reason to cheer, with the uncertainty from the US election now behind us and the incoming Trump administration seen as market friendly. Most central banks appear to be fully ‘in play’ and willing to support their economies with rate cuts.

Fears of slowing growth have overtaken fears of inflation in most regions. Europe looks fragile from this point of view, with the likelihood of tariffs on US imports set to make difficult conditions even worse. We have reduced our overweight here, but remain invested in leading global companies listed in Europe, which are likely to be less negatively affected, while offering upside from China stimulus.

The China policy put is also now in play, and here we will be watching for the size and extent of fiscal stimulus to support the economy rather than monetary policy and further rate cuts. The average Chinese household is sitting on much higher savings than it had before the pandemic and has paid off its mortgage and other outstanding debt. Unleashing some of this household spending power is key to more sustainable economic growth.

Although Trump said tariffs on Chinese imports into the US could be as high as 60%, members of the incoming administration say such a high figure is being used as a negotiating gambit and is likely to be watered down. The tariffs may also be circumvented as they were during the last Trump administration, which ended with an increase in the trade deficit with China.

There may even be some upside to the election result for China: now export growth can’t be relied upon, the politburo may introduce significant stimulus measures to boost domestic demand.

It is important to remember that macro is not the markets. And on markets, the fundamentals held up surprisingly well over 2024, with one reporting quarter to go. In normal years, analysts tend to start at 10 to 15% EPS (earnings per share) growth and cut continuously through the year. However, analyst consensus* looks on track to record 10.5% EPS growth in the MSCI AC World index for the year, a number that has remained remarkably steady throughout 2024 given continuing growth concerns. Optimism has stretched into 2025 with consensus expecting 12.6% EPS growth, which would be supportive of fundamentals for investors.

However, with Trump’s inauguration imminent, volatility and what the market may pay for those fundamentals will also likely be a key theme for 2025. There are a number of top-down factors that are having significant influence on equity valuations at present – namely bond yields, geopolitics and economic growth. Uncertainty around growth is greater than usual as we wait for more news on tariffs, fiscal spend, deregulation and so on and how these feed through to inflation and central banks’ reaction functions.