7/21/2021 12:00:00 AM

Market Update - July 2021

Welcome to the July market update.

In our latest video, we were joined by Guy Thornewill, Head of Research UK & Europe & Senior Investment Analyst, and Toby Woods, Senior Investment Analyst for Global and UK & Europe funds. We covered off these questions.

  • Do we have concerns around economic growth or inflation?
  • What impact are global Covid-19 hospitalisations having?
  • What types of companies are we interested in at the moment?

We have also included a transcript.

Kind regards,

MARK DEVCICH
Chief Investment Officer & Portfolio Manager



TRANSCRIPT

Sam de Court: Hi everyone, my name is Sam de Court, and thank you very much for tuning in today. I think this is actually the first video that we've done in the last 18 months where Mike Taylor hasn’t joined us, he's actually away with his family on school holidays. So thank you for stepping up Mark Devcich. So it's all familiar faces today. We've got Mark Devcich, our Chief Investment Officer and joining us as well over from London, Guy and Toby, thanks a lot guys. 

Guy, it looks like a particularly beautiful evening over there in London tonight.

Guy Thornewill: Yeah, we've got a bit of a heatwave going on, so hopefully it lasts a bit longer. 

SDC: Very good. So Mark, first of all, there's been a heck of a lot going on in markets in the last couple of weeks, can you please talk us through what's been happening?

Mark Devcich: Yeah that's right, Sam. So recently we've seen a little bit more volatility in the markets and this has been caused by investors’ concern around growth in the market. We've seen the 10 year interest rate in the US actually decline quite dramatically from about 1.75% a few months back to only 1.2% today and that's normally a sign that investors are concerned about global growth. 

We don't think in the short term, there's actually much of a concern around economic growth because consumer balance sheets are in great position, governments around the world, their fiscal spending is extremely high right now trying to support economies coming out of the lockdowns, interest rates are very low which is accommodative for consumers, and unemployment rates are low. There are a lot of anecdotes around the world, businesses can't find staff right now. 

So, the only caveat to this I'd say is if Covid-19 hospitalisations increase around the world. We're seeing this new variant Delta spread, it looks to be more transmissible but potentially less deadly. And also if you combine that with increased rates of vaccinations, the level of hospitalisations around the world right now is far lower than what it was last year when the first waves were happening. So at the moment. I think economic growth should be sustainable, but we just have to keep a track on those hospitalisation numbers. 

More of a concern I think in the short term is inflation. We're seeing more and more companies come out in recent earnings calls saying how supply chains are disrupted, shipping costs are astronomical right now, cost of goods sold are increasing, they can't get staff, they're gonna have to pay staff more to stay with them and even sign on bonuses and things like that. So costs are going up, that's going to push up inflation in the short term. The question is, is it transitory, or is it more long lasting? That's the real concern I think we need to be worried about right now because if it does last a period of time, that's going to force central banks to really think about putting interest rates up. So what are we doing about this? Well, we're looking for companies that can kind of price their way out of this, so business models where companies can apply a charge or a percentage of value of the transaction. So examples of this are MasterCard, Visa, and Tyro in Australia. These are all payments companies. They charge a percentage of the transaction value. If transaction values are going up because of inflation, these companies are making more revenue, and their profit margins will increase. That's quite a nice business model to invest in if you're worried about inflation, and we've got a lot of examples of those in the portfolio.

SDC: Thank you very much Mark. Over to you, Toby, so back in April, we had our investor series around the country and you obviously dialed in with a video from from London, you joked about looking forward to having a beer with with Guy. Have you had that beer now that lockdowns have eased, and what's happening over in the UK, talk us through it.

Toby Woods: Yeah so we did have our beer, and it tasted great and it was such a relief to be allowed out again. Although we had to sit down at a table in the pub, as we weren't allowed to stand at the bar, something us Brits are not particularly used to. I guess that's just one of the many nuances actually about the whole lifting of restrictions that we’re currently going through because it's often become quite confusing about what is and isn't allowed. Take weddings, for example, originally weddings were allowed, with 15 people. Then it was moved up to 30 then it changed to unlimited people that had to be outside, and no dancing was allowed. Now dancing is once again on the cards, even encouraged I would imagine. But wedding venues have a legal duty to manage transmission risk, and I'm not even sure how that works in practice.

Travel is another minefield. The government starts off with a very simple traffic light system where green-list countries are ones we could visit and not quarantine. Although there are not many of those on that list. Orange (or amber), where we could visit but would have to quarantine for 10 days at home. And red list, where we'd have to quarantine hotels at our own cost, which obviously was pretty prohibitive to go to any of those places. It was then announced that from yesterday, that we could visit amber-list countries, and not quarantine, if we are double vaccinated or under the age of 18 until the government suddenly said, literally on the eve of that changing, that actually France is amber-plus, meaning that we have to quarantine even we've had the job if we go to France. And there's speculation today that Spain might join that list. I guess the point I'm really making here is it's becoming very confusing. And although yesterday was so-called Freedom Day in the UK, when the majority of restrictions were dropped, there's still a lot of hesitancy around doing many of the things that we're used to, especially, like embarking on summer holidays, despite huge pent up demand. The final point here is, what Mark just mentioned, the Delta variant is very transmissible and infection rates are rapidly increasing in the UK and across Europe again. However, the link between infection, hospitalisation and death has largely been broken down by the vaccine, as you would have hoped, but it's never going to be 100%. And this is something that we're going to have to learn to live with. It would just be easier if the rules had a little bit more clarity and stopped chopping and changing. 

What does this mean for the funds? Well we do have some travel and leisure stock exposure, because we know that the demand is very strong and, until recently, actually that was going to be a relatively normal summer, or at least that's what we hoped. But we have been very selective in what we own, holding only those companies that have resilient business models and strong balance sheets. Within our holdings we also have a slight bias towards stocks that will benefit from domestic tourism. So looking at the UK, it will be a net beneficiary of the lack of summer travel as all those pounds or euros that are usually spent in bars and clubs and the Costa del Sol and Ibiza will instead be spent in Devon, Cornwall or Scotland. In any case, it is a small part of the overall holdings, as we generally find much better ideas where growth is more secure from other sectors. So I'll stop there and let others talk about that.

SDC: Thanks a lot Toby. Guy, last time we had you on the video you talked a lot about the sectors that you currently like, and a couple of the examples were automation, animal health and bicycles. What are the current sectors that you're the most excited about?

GT: Thanks Sam. Those sectors and themes that you just mentioned certainly performed well for us over the last year, and we do still have exposure to them through several holdings in the funds. We are always looking for new ideas and themes, so two of those jump out at the moment. The first one is companies that will benefit from the global effort to cut CO2 emissions. So if you remember the US rejoined the Paris Climate Agreement, as soon as Joe Biden got elected, I think it was actually the first thing that he did. And this has given a renewed impetus to the global effort to cut emissions and this has been taken especially seriously in Europe. So, in terms of the policies, the European Commission recently published a set of initiatives called the Green Deal. The main goal of this is to make Europe carbon neutral by 2050. So this will be a big challenge, as it aims to cut emissions by 55% by 2030, that's in only nine years, from 1990 levels, but so far as of today, we're not even up to a 25% cut from those levels. The Green Deal also aims to increase renewable energy as part of a total European energy mix to 40% by 2030. That will be achieved primarily by more wind and solar power although geothermal, green hydrogen, and other forms of renewable energy will also play a role. These goals might be quite hard to meet but the point is that politicians, and indeed most European citizens, are all pulling in the same direction, and huge investment is needed. That then creates a big opportunity for us in companies that enable more renewable energy, or make existing infrastructure more energy efficient. A couple of examples that we bought into this year in the funds are in Encavis, which is a leading operator and developer of wind and solar farms in Europe, and also Samsung SDI in Korea, which is a leading battery maker for electric vehicles, and we see a huge growth in the coming years, especially in Europe. 

The second sector where we've been increasing exposure in is eyecare. As Western and indeed some Asian populations age increasingly quickly, this is creating a long term tailwind for companies that are providing the lenses, the frames, and the equipment that improves people’s sight or help fight eye diseases. Unfortunately, the amount of screen time most of us have been exposed to during the pandemic has only made the situation worse. But that's also a sector we're looking at right now.

SDC: Thanks Guy. I had actually noticed earlier on that all three of you have glasses and I’m the odd one out. Do you have a couple of examples of eyecare stocks that you're looking at or that we’re currently holding?

GT: Yeah sure. I'd highlight a couple of companies, both of which are actually larger market caps and they’re owned in Pie’s Global Growth 2 Fund. The first one is Essilorluxottica, that's the global leader in lenses and frames. So I've actually known Essilor for 15 years, because I was an analyst covering on the sell side, way back in 2005/2006. It's a high-quality market leader with sustainable margins. Indeed I actually clearly remember visiting one of their labs in Poland in 2007. The company actually merged with Luxottica, an Italian company, a couple of years ago, and Luxottica is a leading frame maker for ordinary glasses as well as sunglasses. So when you put those two companies together, the combined entity offers really good exposure to the eyecare theme, and they're still extracting synergies from that merger. 

Furthermore, Essilorluxottica recently acquired GrandVision, which is another European company. That offers further potential revenue and cost synergies.

However, it's not just the larger companies that offer opportunities. Last year in Pie’s UK & Europe Fund we bought shares in Revenio. So this is a much smaller company, it's actually a Finnish medical device company that offers screening equipment to detect eye disease such as glaucoma which is becoming more and more prevalent, especially as populations age. So we made over a 60% return on that investment that we did exit  last year as the valuation became too high in our opinion. However, it does show the kind of returns available in this sector, and we're certainly on the lookout for similar ideas in the future. 

SDC: Thank you so much for joining us Guy, Toby and Mark. To everyone who is watching, thank you for watching. Thank you for your ongoing support of Pie, it’s hugely appreciated. And have a fantastic month ahead. Thanks everyone. 



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