Equity markets continued to gain through December. The MSCI World Net Total Return Index increased by approximately 3%, similar to US equities, which saw the SPX Index increase by approximately the same percentage. The Dollar decreased (DXY Index dropped by approximately 1.92%) and erased most of the gains achieved during the calendar year.
The generic US Government 10 year yield started at 1.78 and closed the month at 1.92. Over the same period, volatility as proxied by the VIX Index, saw a couple of spikes above 16 but remained muted relatively speaking.
As equities continued to perform, the Sturdza Family Fund’s largest contributor to performance was the equity book. Specifically, the top contributors were Royal Caribbean Cruises, Apple Inc. and Booking Holdings. On the other hand, Nidec Corp., Asahi Group, and Kose Corp. were the largest detractors.
Royal Caribbean’s stock price has been range bound for most of 2019, as investor concerns over the sector’s historical cyclicality outweighed the competitive edge cruise operators have been able to build over the past few years. Indeed, weakness in consumer spending led by a downturn, could affect the sector, alongside volatility in input prices.
However, the global cruise market is increasingly difficult to enter and should offer the opportunity for the “big three” cruise carriers to maintain or increase their market share and lead to more control over pricing. Additionally, the Investment Adviser believes that the newer and more cost-efficient ships deployed should result in improved free cash flow and shareholder capital returns going forward. In that sense, the latest results were encouraging and helped push the stock price close to its upper range.
Consumer demand bodes well, there is no sign of weakness, every market is up compared to last year and favourable trends in booking/pricing have accelerated. As a result, management expects positive yields throughout 2020 on a lengthening booking window. Furthermore, the Investment Adviser also believes that Royal’s customer base is underpenetrated and has the potential to grow.
Domestically, the baby boomer demographic should translate into more business as this population cohort reaches retirement age. Abroad, the company’s dedication to source cruisers from international markets like Asia and Europe (with lower penetration) provides yet another future source of significant demand potential.
Finally, the high satisfaction rates and percentage of repeat clients underline the importance of capturing these underserved markets for Royal’s customer demand growth to remain healthy over the long term. As such, the Investment Adviser perceives a solid risk/reward at current levels and expects the stock price to move in tandem with continued growth and good execution.
Nidec failed to meet consensus expectations when its last quarterly results were reported. Nonetheless, the Investment Adviser is still confident in the position of the business and future growth prospects. Management explained that the shortfall was the result of an unexpected increase in upfront investment costs for their traction motor (the main motor for electronic vehicles) due to increased demand.
This is actually a positive development as it suggests that the company’s new business line is poised to grow faster than expected. Nonetheless, the stock price has been under pressure since its November highs, a stagnation that seems more related to fundamental uncertainty, such as how the Chinese, European and U.S. economies will fare, rather than a company specific issue. For the stock itself, investors appear to have a “wait and see” mind set.
Going forward, a lot of the stock price’s movement will depend on how management’s mid-term plan unfolds alongside underlying fundamental trends. Looking onward, the Investment Adviser believes that the company is well positioned to capture the increasing demand for efficient motors in many different industries and applications.
In 2019, some of the most important overarching themes were trade tensions, the Fed turning accommodative, a general slowdown in global manufacturing, a strong US consumer and the yield curve inversion and reversion. Nonetheless, the fundamental market drivers over the year were seemingly linked to trade and central bank activity. The year began with optimism on both subjects, then as markets increased, trade tensions intensified and global growth concerns followed.
This said, those fears were somewhat abated by the Fed’s accommodative stance and/or volatile yet constructive news flow on trade tensions. Therefore, SPX Index returns were apparently for the most part, a function of general sentiment rather than EPS growth. As such, the Investment Adviser expects earnings growth to be of greater importance for the upcoming year as long as the overall landscape does not deteriorate.
In light of the above, signs of stabilisation in macroeconomic activity and geopolitical risks are allowing investors to anticipate continued upside with higher probability in 2020. While many risks are still lurking, or in certain instances increasing, as the global cycle is prolonged, the technical backdrop for equities remains positive especially in the form of a lack of alternatives, underinvestment and momentum. As such, the Investment Adviser is progressively increasing the Fund’s equity exposure whilst maintaining an overall cautious stance.
The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Funds as of 17/01/2020 and are based on internal research and modelling.