Vermeer World View

Putting You In The Picture - May 2022

5th May 2022

April was a very difficult month for global equities. Markets were hit by a number of negative issues and a strong rally that began in March petered out and the month ended on a very weak note leading April to be the worst month for US equities since the last recession. The Vermeer Global Fund declined by 4.4% during the month, in line with global markets and is down 10% year to date.

The Federal Reserve has become materially more hawkish in recent months and as expected, increased interest rates by 50 basis points at its early May meeting and confirmed that it intends to start running off its balance sheet from 1st June. Having failed to tighten policy when the US economy rebounded very strongly in 2021, the Fed now faces a problem of having to tighten policy just when the US economy is potentially starting to slow and is at risk of accidentally causing a recession by raising rates too far, too fast in order to try and catch up to a more appropriate monetary policy setting. As a result, US government bonds have fallen very sharply and had a substantial knock on effect on global equity markets and also materially strengthened the Dollar.

The Chinese economy is suffering a period of weakness exacerbated by the COVID-19 lockdowns. Whilst the rest of the world is mostly opening its borders, major cities including Shanghai and Beijing have been struggling with increasing lockdowns and this is negatively impacting the Chinese economy and also exacerbating the supply chain issues that have become a major hindrance to the global economy and look set to worsen in the short term. As it has done in the past, China is seeking to invest in infrastructure to help its economy get through this very difficult period, but for the economy to really gather momentum it is likely to require the zero COVID policy to come to an end.

The weakness of the Japanese Yen has had a considerable negative impact to the performance of the Vermeer Global Fund so far in 2022. We have been overweight Japanese equities for a considerable period of time and still strongly believe in the long term attractions of a number of companies in this market and are still looking to add further to this part of our portfolio. However, we have been taking a patient approach to this whilst the Yen depreciation had made it a virtually impossible task for Japanese equities to perform well in a global context. Ironically the Yen’s weakness will be helping the competitiveness and profitability of many of Japan’s export led companies.

Keyence, the Japanese visions systems company, produced another excellent set of results and is a company that will benefit from the weakness of the Yen. Keyence has long been one of the largest positions in our portfolio benefitting from the structural growth in factory automation. Keyence generates incredibly high gross and net margins and as a result we believe justifies the premium it sells on to the broader market. Keyence shares have been caught up in the sell off in growth stocks this year and has underperformed the global market quite considerably following a long period of outperformance. We continue to believe that Keyence will be a long term winner from the structural increase in industrial automation, which is being increased by the labour shortages that are impacting so many companies at this point in time.

Shimano’s results once again demonstrated the continuing high levels of demand for cycling products and also the strong growth in the emerging e-bikes business. Shimano has been a major beneficiary of the strong growth in cycling that has been driven by the pandemic and is naturally seeing a peak in short term revenues. Despite another set of excellent results, the stock fell heavily on the day of their release as once again investors fear that the company has reached the peak of its potential. Whilst growth will inevitably slow, we see Shimano as really well placed to continue to benefit from the growth in cycling as a leisure pursuit, whilst e-bikes have the potential to be a huge business for the company in the longer term.

Amazon shares declined by 14% on the day of their results, which was disappointing but somewhat typical of the reaction to a number of results in the latest earnings season that did not meet market expectations. Amazon has been one of the strategic winners from the digital acceleration that has been caused by COVID and has invested very aggressively in both its retail and cloud businesses. Whilst the retail business is now inevitably slowing, the AWS Cloud service business continues to grow at a very strong rate and in addition, highly profitably advertising revenues are also a strong driver of profitability and cash flow. In the short term, investors are focussing on the weakness of retail, but we believe that the sustainable growth in the cloud business and advertising will come more into focus and once again, lead Amazon shares to perform well.

ASML produced another solid set of results in April, which once again highlighted the strength of its position as the world’s leading supplier of lithography machines to the semiconductor industry. Not only does the company have a dominant share of existing customers, but the growing trend of reshoring that is being caused by the need for technological sovereignty, notably in the United States and Europe, is potentially creating a whole new customer base for the company. This is giving ASML a greater degree of visibility over its long term growth trajectory that is likely to be detailed at a newly planned investor day in November this year. As recently as October 2021, the company projected revenue targets of double digit growth as far out as 2030, which is virtually unprecedented and gives a clear impression of the incredible line of sight that the company has as the semiconductor industry continues to grow as part of the ongoing digital transformation.

For a very long time it feels as if there has been no alternative to equities for investors as cash and bonds have offered such a low return, but rapidly rising interest rates are altering this perception as ten year US Treasury yields have moved up to close to 3% at the end of April. We have modestly increased our cash weighting over the month to around 8%, which we feel is appropriate given so much uncertainty. We are looking to potentially add stocks that we do feel are treated excessively harshly on results if, in our judgement, they are only being temporarily impeded by supply chain issues that will ultimately prove to be transitory. However, with so much uncertainty in global markets likely in the coming months, we feel it is appropriate to continue to tread very carefully and maintain a higher than normal cash weighting.

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.