Vermeer World View

Putting You In The Picture - September 2021

6th October 2021

September was a more difficult month for global equities. After a stellar performance year to date, the S&P 500 retreated, giving back just under 5% of its gains but remains higher by a more than healthy 16% so far this year. In contrast, the Japanese market enjoyed a strong rally in September, rising by 5.4%, but still lagging the performance of the US market by just under 10% since the start of the year, albeit the gap between the two markets has closed from over 20% as recently as the middle of August.

Overall, the global benchmark fell by 2.1% over the month and the Vermeer Global Fund performed broadly in line. This was disappointing given the outperformance of the Japanese market we had anticipated finally occurring in September.

In the US, further hints of tapering by Federal Reserve Chair Jerome Powell and uncertainty surrounding the potential breach of the US debt ceiling and passage of the Democrats reconciliation bill created a tumultuous market. Ten-year US Treasury yields moved sharply higher, rising from a recent low of around 1.12% to above 1.50%. This has led to a sharp selloff in highly valued growth equities and a number of stocks in our portfolio have been hit hard, giving back a little of the considerable gains they have made over the longer term.

In Japan, Mr Fumio Kishida was confirmed as the new leader of the LDP and the new Prime Minister, which hopefully will now lead to a significant fiscal stimulus package that will help the Japanese economy rebound strongly in 2022. Vaccination rates now exceed that of the US and Europe and as expected, this has also led to an improvement in sentiment towards the Japanese market. We expect this to continue as we still see the opportunity for investment in Japan as very attractive. We hold a position of around 15% in Japanese equities and potentially will be looking to add further to this.

Sony announced a very exciting tie up with Zee Entertainment in India, giving the new entity a combined 28% market share, causing the shares to rebound strongly. Sony plans to own 53% of the merged company which will combine the two businesses’ TV networks, digital assets, production and perhaps most importantly, content libraries to given them a strong position in a very fast growing and increasingly important market.

Chinese economic data has continued to be weak in recent months. News flow has been dominated by the near financial collapse of Evergrande, sparking fears of contagion in the property market. Inevitably, a weak property market and weak industrial production has led to a material fall in the iron ore price, which has fallen back very sharply in recent weeks, declining to around $100 from an unsustainable peak of $238 before bouncing to $116 at the end of the month. Consequently, the price of Rio Tinto has descended in recent weeks, a fall that has been exacerbated by the company’s payment of a huge dividend to shareholders as a continued statement of capital discipline the company has demonstrated in recent years.

ASML, the global leader in the manufacturing of semiconductor equipment, recently outlined its growth forecasts over the next decade. The company aims to achieve $24-$30billion of annualised revenue by 2025, with gross margins of 54-56%. As the only company capable of producing ultraviolet lithography equipment, ASML’s customers have great reliance on this technology. Secular growth trends are driving huge demand for semiconductors, which continue to outpace supply. In turn, ASML’s customers are investing heavily to meet future demand and we believe that management estimates for around 11% sales CAGR through to 2030 are conservative based on an assumption of continued investment and the drive by many countries to “re-shore” chip production in order to reduce dependency on Asia. ASML has been an excellent performer in recent years, as investors have better understood the strong position the company enjoys. In recent weeks, the shares have seen quite a considerable pullback, and this may create an opportunity to add to our position.

Oxford Instruments announced strong order intake and revenue growth over the first five months of the current financial year but highlighted that currency would have an adverse impact of 4% on revenue and 3% on PBT. The company is well on its way to achieving 20% operating margins as set out in its Horizon project to materially improve the financial performance of the business. End demand from medical, semiconductor, governments and academic institutions remain strong. World leading science in nano technology and a materially cheaper rating when compared to US peers leads us to the view that the company remains a highly attractive long-term investment.

Tight oil supply, capital discipline from oil majors and better cohesion from Opec has resulted in oil and natural gas prices rising sharply in recent months. The Fund has built a major position in BP, a company transitioning its portfolio away from fossil fuels to renewable forms of energy. Many oil companies are simply not investing in new capacity but are, in BP’s case, using their prodigious cash flows generated from higher oil prices to invest in a greener non fossil fuel world such as wind and solar. Additionally, BP’s capital discipline enables the buyback of $2.9billion of its shares in the current year as part of a long-term strategy to retire equity. As well as this, annual dividend growth was 4%, on top of a current dividend yield of 5%. In a market of so many expensive stocks, BP offers a value proposition, an attractive and growing dividend, and the optionality that comes with its transition from oil and gas to greener sources of energy.

We recently initiated a position in Compass Group, the world’s leading contract caterer. Compass produced a highly satisfactory update on current trading, suggesting the recovery in its business is well on track. In many ways, Compass is typical of the high-quality franchises we seek to invest in. Its business model has been seriously impeded by COVID, and as with many excellent businesses, we see it as emerging even stronger from the pandemic with the ability to gain market share and to generate margins and free cash flow that will exceed its previous peak levels before the pandemic struck. News on the 1st October that Merck had successfully developed a new orally ingested drug to help hospitalised COVID-19 patients is also helpful to stocks with a bias towards a more “normal” reopening of the economy. This news was also very positive for one of our Indian outsource drug manufacturers Divi’s Labs. Divi’s holds a licence to be the authorised producer of this ground-breaking product, with the shares climbing 8% on the news

Nike gave a sobering update on the current state of supply chains at its most recent quarterly results. Although demand for the brand remains at exceptionally high levels, factory shutdowns in Vietnam and extended supply chain disruptions led the company to reduce its full year guidance. Management commented that these supply chain issues first highlighted earlier in the year have continued to deteriorate, with in-transit times between US and Asian ports doubling to 80 days. These factors have led to lack of inventory in the right places at the right times, and despite the company shifting to sell as much product through its own retail network and DTC channels along with high levels of full price sell through, this is not enough to offset these issues in the short term. We remain confident in the underlying strength of the brand and would be adding to our position on any continued weakness.

We have edged cash up to around 7% in the short term. Uncertainty surrounding the ongoing geopolitical tension between the US and China and the highly probable turmoil caused by Washington policy makers apparent determination to take every crucial decision to the brink of disaster have given us reason to worry. In addition to these concerns is the upcoming US results reason, which may prove to be choppier than usual as the impacts of the global supply chain disruption and wage inflation could lead to the downgrading of some company expectations. As noted earlier, high quality retailers like Nike have already reported material disruption to its business caused by hopefully short-term supply chain issues.

We don’t own shares in the UK retailer Next but have a very high regard for the company and its exceptional chief executive Simon Wolfson. We did note some interesting comments on recent supply chain issues at Next’s latest trading update where Mr Wolfson stated that “international supply chains are steadily improving as shipping backlogs clear, and factories return to more normal levels of operation. Looking ahead to next year, the price of future shipping contracts is falling and already much lower than today’s spot prices.”

We are continuing to look for an opportunity to add to our already overweight position in Japan. As well as this, we may add to existing positions elsewhere in the portfolio where supply chain issues have crimped short term profitability but are not, in our view, likely to impact the long-term investment case.

Disclaimer: Further information about Vermeer UCITS ICAV including the current Prospectus and Key Investment Information Documents (“KIIDs”) can be found at Past performance may not be a reliable guide to future performance. Investments can go down as well as up and therefore the return on investment will necessarily be variable. Income may fluctuate in accordance with market conditions and taxation arrangements. Changes in exchange rates may have an adverse effect on the value, price or income of the product. Vermeer Investment Management Limited is authorised and regulated by the Financial Conduct Authority (Financial Register Number 710280) and is incorporated in the United Kingdom (Company Number 09081916). Registered Office Address: 130 Jermyn Street, London, SW1Y 4UR. Vermeer UCITS ICAV (“the Fund”) is registered with the Central Bank of Ireland as an open-ended umbrella-type Irish collective asset management vehicle with variable capital (Register Number C154687). Opinions expressed whether specifically or in general or both on the performance of individual securities and in a wider economic context represent our view at the time of preparation. They are subject to change and should not be interpreted as investment advice. This document is intended for use by shareholders of the Fund, persons who are authorised to carry out investment business, professional investors and those who are permitted to receive such information. Nothing in this document should be construed as giving investment advice or any offer, invitation or recommendation to subscribe to the Fund. Any decision to subscribe should be based on the Fund's current Prospectus and KIIDs.