C WorldWide Global Equity Trust (ARO0006AU) Report & Performance

Among the top contributors to performance in November were Sony, ASML and Siemens. Sony, in addition to benefitting from being a cyclical, Asian-listed company with semiconductor exposure, issued a “beat-and-raise” quarterly report. Operating profit in the quarter grew 8% y/y and full-year guidance was raised due to strength in its Music, Movies and Sensor businesses. The company’s largest segment, Game & Network Services, with its key
PlayStation franchise, has struggled with supply of new consoles. Only 3.3 million units were sold during the quarter. Production was almost twice as high though, which bodes well for the upcoming holiday season and for subsequent sales of high-margin software.

ASML held its capital markets day in Veldhoven, Netherlands, and substantially upgraded its guidance for 2025 and 2030. The midpoint of the 2030 revenue guidance was raised more than 30%, due to stronger demand for chips from datacentres, the automotive industry, and industrial applications. Interestingly, ASML also suggested that the need for countries to achieve technological sovereignty will increase the need for semiconductor capacity.

This is expected to add a 1%-point to annual unit growth, and it is a concrete example that globalization is slowing. Atlas Copco, a key sub-supplier to ASML, also highlighted this trend at its recent capital markets day. In the long run, oversupply is bad for everyone, but in the medium term, semiconductor equipment manufacturers will benefit from what ASML expects to be a 10% inefficiency in global semiconductor manufacturing by 2030. Shares of ASML have surged almost 50% since mid-October due to a combination of lower rates, a strong Q3 report and the company’s upbeat long-term guidance.

Among the top contributors to performance in October were Visa, Novo Nordisk and ASML. Visa reported solid numbers with payment volumes growing 12%, the same pace as last quarter and thus not showing any signs of a consumer slowdown. Cross border travel, and the attributed high margin cross-border-payments, is still a long way below pre-Covid levels. Analysts at Morgan Stanley report that departures to Asia are 52% below 2019 levels and the corresponding number for Europe is 21% below. Visa direct, a key driver for Visa, beyond the cyclical recovery after Covid, grew 42% in the quarter, accelerating by 700 bps. The shares of Novo Nordisk, a key outperformer all year, continued to do well during the month as the European Medicines Agency, EMA, warned of supply shortages of Ozempic, due to increased off-label use for the treatment of obesity. The GLP-1 treatments, led by Novo Nordisk’s Ozempic have gone viral, with Ozempic getting north of 200 million views on TikTok. Supply shortages for its new drug Wegovy soon to be relaunched in the U.S., could continue to be an issue for the company, but the demand is clearly there. The order intake of lithography maker ASML, reached a record high in its third quarter at 8.9 billion EUR. This is up from a range of 1.5-2 billion just a couple of years ago and up 44% over last year. Meanwhile, the company claims that only about 5% of its backlog will be impacted by the new US export restrictions. Its EUV machines, now close to half of its systems sales, have been restricted for sale to China since 2019 and are not affected by the new ban.

Among the top detractors were AIA, Amazon and TSMC. Similar to last month the list of detractors had a geographical tilt, with several of the top detractors being listed in Asia. As the new semiconductor export restrictions were announced, many of our holdings related to this sector experienced further declining share prices. Amazon reported disappointing numbers across the board late in the month with operating income coming in 48% lower than last year, sales guidance weaker than expected and growth in AWS decelerating by 500bps from last quarter. Amazon is one of the companies in the portfolio with the longest-term thinking and the management team normally has a large degree of leeway to take the company through extended periods on increased investments. At the moment though, that long-term thinking, backed by significant investments, is coming up against a rapidly slowing consumer environment, especially in international markets where sales declined 5% over last year and a reversal of overearning during Covid. Amazon arguably overinvested and over hired coming out of Covid at the start of this year. While consumer demand could be weak for a couple of quarters, creating share price headwinds, the investments Amazon is making now will enable it to gain market share as the economy recovers. We have not seen convincing evidence that the shifts to online shopping or the move to the cloud are changing pace structurally.

In the quarter, the strategy’s return was negative 0.31%, above the MSCI AC World Index which returned negative 0.34%. The U.S. Federal Reserve hiked rates by 75 bps two times in the third quarter. In combination with U.S. money supply falling at an annualized rate of 1.6% over the last three months, the steepest drop in 84 years, this is starting to influence asset price volatility. The VIX, or “fear index”, increased from a relaxed 20 in mid-August to north of 30 by the end of the quarter. The real spike in volatility though has been seen in the bond and currency markets, where the MOVE index, measuring the volatility of Treasuries, reached close to 160, a level only seen at the Covid-lows and the financial crisis. Several sentiment indicators hit historic lows such as U.S. consumer confidence and the AAII Bull/Bear survey. This is usually a very good sign for subsequent 12-month market returns. On another positive note the second quarter earnings season surprised many investors as the technology giants, Microsoft, Alphabet and Amazon (all holdings in the fund), showed resiliency in an environment where demand clearly is waning and a sequential slowdown from last quarter is evident.

The top three list of contributors for the quarter was comprised of Amazon, Hoya and BCA. Amazon has had a tough 2022 navigating the demand swings during and after Covid. After a period of overinvestments and overstaffing, Amazon reported a strong second quarter report that showed that the company can handle an inflationary environment. Revenue accelerated to 10% growth, adjusted for currencies.

The top three detractors from performance were AIA Group, Sony and Novo Nordisk. On the top ten list of detractors this quarter, we find a lot of Asian names, and companies with sales related to semiconductors. Sony, having both attributes, as well as exposure to a weaker consumer through its gaming business has sold off since mid-August.

Global markets generated positive returns helped by one of the strongest August equity market performances on record. The Nasdaq Index had its best August performance since 2000 and the S&P500 Index since 1986. Much better than anticipated corporate results combined with very supportive liquidity and an improving economic environment provided tailwinds to investor sentiment. However, market leadership remained narrow with a handful of large cap Technology and Consumer Technology stocks having an outsized contribution to overall equity market returns.

While the portfolio has benefitted from the leadership of growth stocks since the stock market bottom in March, this leadership is now increasingly narrow – and with some signs of exuberance last seen in the final months of the technology bubble. Meanwhile, the reality for presumptive buyers of goods such as cars in the US is not as optimistic as share prices imply. In fact, consumer spending in the US has now been flat since the end of June. The macro-economic backdrop is positive though since the global economy is on a recovery course as countries are slowly opening again following lockdowns.

Among the top contributors to performance in July were Amazon, Home Depot, and Thermo Fisher. Amazon has had a challenging time navigating the demand swings during and after COVID. After a period of overinvestments and overstaffing, Amazon reported a strong second quarter report that showed that the company can handle an inflationary environment. Revenue accelerated to 10% growth, adjusted for currencies, and more importantly, the guidance for the next quarter of 17-21% growth points to an Amazon growing at the rates that we historically have come to expect. Amazon’s AWS-Cloud unit now has a yearly run rate of close to USD 80 billion, growing in excess of 30%. Perhaps more impressive is the surge in the backlog by 65% to USD 100 billion. The shares rose close to 25% during July.

Home Depot, which only reports in mid-August, saw its shares rebound as lower bond yields and mortgage rates have taken some pressure off the consumer. Late last year 30-year mortgage rates in the U.S. stood at 3%, only to move to 6% in June of this year and as of the end of July now stand at 5.3%. Thermo Fisher raised its full-year sales forecast for the second time this year, on the back of another solid quarterly report. While the clinical end-market declined by 20% due to less COVID testing, core organic growth came in at an impressive 13%. The strength was broad-based with China growing more than 20%, despite lockdowns, and the biopharma end-market growing in the midteens percent.

Thermo Fisher’s PPD, a clinical research services provider, is doing particularly well and the company raised guidance for this unit to 12% growth for the full year. This is pleasing since PPD, an acquisition that closed in December last year, is another testament to Thermo Fisher’s solid track record of inorganic growth. As the balance sheet shrinks below 2x Net-debt to EBITDA, this year, the company could be ready for another sizable acquisition, something the shares historically have reacted positively to.

Among the top detractors were AIA, Procter & Gamble and Bank Central Asia. None of the detractors this month made up a large negative contribution to performance. They simply failed to rise as much as a rapidly surging market. AIA, one of June’s largest contributors gave up some performance, possibly because they usually pause their buybacks one month ahead of the quarterly reports, which sometimes have led to a more volatile stock price.

MARKET PERSPECTIVES
The second quarter marked the end of the worst first half-year since 1970 for US equity markets and the worst first half-year for global equity markets since the launch of the MSCI World index in 1986. This has clearly been a six-month period full of negative catalysts, such as the war in Ukraine, draconian lockdowns in China, continued supply chain disruptions, higher inflation, and an aggressive hiking cycle by the US Federal Reserve (Fed) supplemented by quantitative tightening. There are some signs though that inflation is peaking with U.S. 10-year rates down close to 50bps from the high mid-month. Furthermore, many cyclical commodities are down substantially from their highs, copper for instance by 25% since the highs in March, signalling the anticipation of a weaker economy and rising chances of a Fed that need to become more dovish at the end of the year, a development that should support heavily de-rated growth stocks. There are also tentative signs that the Chinese lockdowns seem to be getting less restrictive something that supported Chinese equity markets during the month. If the lockdowns are eased further this would remove one dampening effect on the global economy.

PORTFOLIO PERSPECTIVES
In the quarter, the strategy marginally outperformed the benchmark. The top contributors for the quarter were AIA, American Tower, and Novo Nordisk. After a long period of transforming its agency network in China from a mass-market sales force to more modern distribution channels, AIA in May saw a development of increasing numbers of agents. While it is too early to tell if the transformation is complete, so far this year AIA has reduced its number of agents by only four percent and may now see increases in all regions in China. After very strong momentum all year in its obesity franchise, the market now expects another upgrade to guidance when Novo Nordisk reports results in early August. Furthermore, the third quarter is full of catalysts with phase 2 data on CagriSema in type two diabetes and supply updates for Wegovy among the most anticipated. The shares traded strongly ahead of these events. American Tower benefitted from investors flight-to-quality during the quarter.
The top three detractors were Amazon, Alphabet and ASML. Equity prices of technology companies with exposure to the digital ad market, such as Alphabet and Amazon suffered after the competitor Snapchat preannounced negative results and pointed to broad-based weakness in digital ads across regions and verticals. There are some reasons to believe that this could mostly be an issue for Snapchat and not the broader group of all digital ad companies. Snap has minimal exposure to the travel segment and with consumers shifting spending to travel away from buying merchandise, Snap could be a relative looser.

The semiconductor industry experiences a downturn every 3-4 years often triggered by GDP growth falling below 3%. Increasing pressure on more consumer-focused products such as PCs, 5G Phones and gaming cards and their related chips, could now also start to spill over into datacenter- and cloud-related semiconductors where demand still has held up. The average semiconductor downturn sees 12-month forward P/E-ratios falling on average by 26%. This downturn, however, has so far seen P/E-ratios falling by 42%, suggesting the bottom in semiconductor stocks could be near. While this does not consider high starting valuations, one supporting factor is the more structural growth we now see in the semiconductor sector as increasing penetration of chips in everything from smartphones, cars, and sensors are helping to offset the cyclical headwinds.

PORTFOLIO CHANGES
During the quarter we sold the investment in Unilever and added the industrial gas company Linde. Linde together with Air Liquide and Air Products forms an oligopoly in the western industrial gas industry. As these suppliers of compressed oxygen, nitrogen and other gases are highly integrated with their customers and as contracts are long-term in nature, the revenue streams are highly predictable. Unilever has a disputable track record in value creation, especially from expensive bolt-on acquisitions in recent years. In addition, the more recent debacle around the GSK Consumer Health bid has reduced our faith in the management team’s strategy on capital allocation.