Market Review

Global equity markets began the year in positive territory, with growing optimism of a ‘Goldilocks’ scenario, as growth accelerated with rate cuts expected to follow.

The US economy continued to surprise to the upside despite persistent fears around high interest rates, high inflation and slowing employment growth. With commodity prices accelerating into the new year and services inflation remaining sticky, the outlook for the Fed Funds rate is increasingly contentious. Meanwhile, growth in the Eurozone has faced headwinds despite positive signs that the economy is improving, and debate has commenced as to whether the European Central Bank may lower rates ahead of their US counterparts. The Bank of Japan ended eight years of negative interest rates in a historic move and we visited Tokyo in March and came back with the conviction that Japan’s renewed focus on shareholder value has staying power. Geopolitical risks remain heightened with the situation in Ukraine and the Middle East ongoing and with the potential for escalation.

Performance

The strategy lagged the MSCI ACWI IMI reference index during the period, driven by individual stock setbacks and the continued underperformance of the smaller and mid-cap size equities that the strategy is biased towards. 

Aixtron, the German-based compound semiconductor tools producer, reported in-line results for 2023 with strong revenues, order intake, and new customer additions, yet guidance for 2024 was  isappointing. Sentiment was further impacted by the simultaneous announcement from one of Aixtron’s customers that it would end its microLED investment program; however, management has assured us that other customers continue to invest in this technology, which requires Aixtron’s tools, and we continue to believe in future demand for microLED, with potential to deliver 90% energy saving for displays compared to existing LCD technology.

Yduqs, the Brazilian education provider, also had a weak start, with the broader Brazilian market down and concerns around the regulatory environment for distance learning. We believe these concerns are unfounded and may boost Yduqs, which also has a physical presence on campus and stands to benefit from these changes. 

Positively, Japanese-based Horiba gained 45% during the period, with the announcement of an ambitious new long-term plan and improved earnings, driven by rising demand due to Euro 7 emissions regulations and continued strength in orders for its class-leading mass flow controllers as generative AI applications grow.

Lonza also performed strongly during the quarter, gaining 52%, driven by the acquisition of a US biologics site from Roche, which will double its current biologics commercial capacity, and which led to raised mid-term targets. In the current geopolitical environment, Lonza may also stand to gain from any regulations limiting its Chinese competitors.

Outlook

It remains unclear how the inflation data reported at the start of Q2 might affect the cadence of interest rates stateside, but recent commentary supports the view that the ECB remains committed to cutting rates sooner rather than later. We remain of the view that the worst of the interest rate headwinds on company cashflows are behind us.

From an equity market perspective, we would expect the discount that small and mid-cap companies now trade at relative to their larger counterparts to gradually close. While the move in the last two months of 2023 was ultimately ‘too much, too soon’, markets will revert to that trend as long as inflation does not head back to the lofty levels seen in 2022.

We remain optimistic about the portfolio’s growth, with some of the destocking headwinds from 2023 turning to tailwinds and continued growth in demand for innovative solutions to environmental and social challenges, and will continue to use volatility to reaffirm our conviction, increasing position sizes at attractive valuations when the timing is right and adding new, exciting businesses to the portfolio along the way