It’s All About Earnings in The End

After the strong rally at the end of 2023, the start of 2024 saw a retreat in our investment values as inflation numbers came in a little stronger than expected and longer duration interest rates increased (bond values went down). These increased rates fed into equity prices as well in the early part of January although both bonds and equities have been recovering again in the last few days.

The impact has been slightly stronger in the UK than the US and the resulting upswing in UK rates has seen the pound strengthen a bit against the US dollar. 
It was against this backdrop that we met with our macro advisers TS Lombard, the results of which we fed into our online Q&A.  Over 60 of you attended the Q&A and there were more than 50 on the call by the end of the hour, so thank you for listening. We received some good feedback which is always welcome. 

The main outcome from the review with TS Lombard was a very negative view of China, which we have already acted on, as highlighted by Nick Gait below. 

As I suspect almost all wealth managers will have been doing, we discussed again, the conundrum of tracking the S&P 500 index or investing actively in US shares, we do both. 

So, it is with keen interest that we are watching Q4 2023 earnings being unveiled along with earnings outlooks.  There are still a lot to report but a few have already caught my eye which highlight the active investment approach of our equity fund managers. 

Anyone using social media will likely have seen the backlash of late against electric vehicles. Yes, they reduce emissions and in cities all over the world the move to electric is a blessing, even in our own road in Barnes (inside the low emission zone) we note cars are getting quieter and front doors less dirty. But EV’s can’t be the only solution and have some big drawbacks, I won’t go into details, just watch You Tube!  
Tesla is a fascinating company run by a fascinating individual. Is it just another car company, or is it going to control autonomous driving and robotics?

This week we found out that more and more investors are valuing it as another car company, and on that basis, its shares still look eye wateringly expensive.  There are still enough investors who believe in the future earnings of Tesla to value it at more than 10 times the value of Ford Motor Company both in overall value and multiple of earnings.  

But it is getting cheaper!  Tesla’s shares are down 50% from their peak in 2021 when it hit a $trillion dollar valuation and despite a 100% rally in 2023. They had already fallen 17% since the start of the year and fell another 12% yesterday on the back of their Q4 results and outlook which were worse than expected.  

It still looks like a very risky investment to us, and our active managers agree. It’s way too expensive to attract our ‘value’ managers and does not have a growing dividend track record to attract our ‘quality growth’ managers. To invest now even after the falls this year and in 2022 it’s a highly speculative investment.  Being underweight Tesla will have hurt our relative performance 2023, but not in 2022 and not so far in 2024.  Our only significant exposure will be through the S&P 500 index and that’s getting smaller as its market cap falls and others rise. 

Nick Gait tells me that only 3 companies have managed to stay in the top 10 largest companies in the world for more than two decades. 

Those who watched the Q&A will note I name checked Intel which is held by our value managers at Schroders. This is a turn around story in the largest semi- conductor manufacturer. Intel missed out on the smart phone boom and suffered badly due to a post Covid lockdown lull in sales of PCs where it is still a dominant supplier.  From a high of $60 a share in March 2021, a value it also briefly reached 20 years earlier in the dot com bubble, it fell to just $25 dollars at the start of 2023 attracting our value managers. 

The shares doubled in value up until yesterday’s earnings which beat the 2023 Q4 estimates but flagged a lower revenue than forecast in Q1 2024. Intel’s management are confident in turning the ship around and it operates in a very buoyant market, buoyed by the prospect of the impact of AI. It is not without risk and such recoveries rarely happen in a straight line.  The stock has opened down 10% today after the weaker outlook but is still up 75% since the start of 2023. 

This is the favoured semi-conductor investment held by three of our ‘quality growth’ managers including our high conviction manager of the Heriot Global fund.  It’s got it all, great margins growing profits and whilst like Intel it is flagging potentially lower demand in 2024, its prospects into 2025 look great.  The Dutch companies’ shares are not cheap at c40X earnings, few of the companies these managers will buy are cheap, but they are not as expensive as Nvidia’s shares, which are twice as expensive on a relative to earnings basis. 

ASML beat expectations in its 2023 Q4 report and its shares are up 18% already in 2024.  Not as much as Nvidia’s but without the higher risk that comes with such a high valuation. 

Generally, from what we have seen so far corporate earnings are looking pretty strong. According to Bloomberg, 26 January 2024, 20 companies in the S&P 500 have surprised on the downside in their earnings reports and 84 on the upside outperforming earnings estimates. 

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