Saxo Morningstar Moat EUR Q2 2022 commentary
| Instruments traded | Stocks |
| Asset classes | Global equities (excluding emerging markets) |
| Investment style | High quality stocks that are priced at a discount to fair value |
| Dividend yield | 3.11% |
| Quarterly return | -10.69% (net of fees) |
| Annualised volatility (since inception) | 23% |
Market overview
At a Glance
- Equities and bonds continue to come under pressure from rising interest rates and persistent inflation.
- Fears of a recession continue, although corporate profits have remained robust so far.
- Within equities, large performance differentials exist. Energy companies remain the standout in 2022 and growth-oriented stocks the laggards. Within bonds, short-dated bonds are holding up, while those sensitive to interest rates and credit risks have struggled.
- Looking ahead, improving yields and valuations are a positive development for investors in pursuit of their long-term goals.
For just the second time in 40 years, bonds and stocks generated losses for two consecutive quarters. The primary driver of the 2022 downturn continues to be inflation and the consequential reset in investor expectations. In this regard, uncomfortably high and persistent inflation has prompted central banks to raise interest rates, while the war in Ukraine pushes up energy prices and disrupts supply chains. Prominently, the U.S. Federal Reserve raised rates in May and June (1.25 percent) and promised more hikes until inflation reaches the 2 percent goal.
Corporate earnings have remained robust so far, but profit margins are under pressure from rising costs, and revenue growth is in doubt as consumers rethink their spending plans. High commodity prices are also proving problematic for inflation, as oil prices keep rising. That said, other key commodities including gold, wheat, and copper have declined, perhaps as a sign of demand-led concerns surrounding the global economy.
At the sector level, energy stocks are the standout performer, while defensive, value-oriented areas of the market have lived up to their reputation and held up relatively well during the downdraft; these sectors include healthcare, utilities and consumer staples, all of which provide services that are required in both good and bad times. Generally, stocks in these categories are considered less volatile and less affected by the ups and downs of long-term market cycles. Among the laggards, the dominant trend continues to be the fall of growth stocks.
Turning to fixed income, bonds of all kinds ended the quarter in the red, as the rise in yields and decline in prices seen during the first quarter rolled on. On a look-through basis, bonds with less sensitivity to changes in interest rates are holding up relatively well.
The strong US dollar has also significantly contributed to outcomes. Currency exposure therefore remains an important risk mitigation tool.
Portfolio performance (net of fees)
| April | -2.3% |
| May | -2.8% |
| June | -6% |
| Inception (July 2016) | 90% |
Top 10 portfolio holdings (as of 30/06/2022)
| Name | Weight (%) |
| Leonardo SpA Az nom Post raggruppamento | 5.42 |
| Ionis Pharmaceuticals Inc | 4.45 |
| Hongkong Land Holdings Ltd | 4.42 |
| Alibaba Group Holding Ltd ADR | 4.32 |
| Imperial Brands PLC | 4.12 |
| Banco Santander SA | 4.00 |
| Lloyds Banking Group PLC | 3.96 |
| Biogen Inc | 3.74 |
| Dassault Aviation SA | 3.62 |
| Incyte Corp | 3.62 |
Top Performers
Imperial Brands
Imperial Brands is the world's fourth-largest international tobacco company (excluding China National Tobacco) with total fiscal 2021 volume of 232 billion cigarettes sold in more than 160 countries. The firm holds a leading global position in the fine-cut tobacco and hand-rolling paper categories, and it has a logistics platform in Western Europe, Altadis. Through acquisition, Imperial is the third-largest manufacturer in the US and owns the Winston and blu brands.
Alibaba Group Holding Ltd ADR
Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). On June 22, China’s National Radio and Television Administration and Ministry of Culture and Tourism released new regulations governing livestreaming, with guidelines that amount to a code of conduct for online live streamers covering matters such as the qualifications required to livestream certain professional topics. If there will be more specific responsibilities for internet audio-visual platforms, this could increase compliance costs. Performers can face much greater risk. Article 15 and 16 of the regulations indicate the government will strengthen supervision and inspection as well as enforcement of rules for internet audio-visual platforms, agencies, and livestreaming hosts. At this stage, there is an expectation that the regulations will have an immaterial impact on the Chinese internet companies.
Hongkong Land Holdings Ltd
Hongkong Land is a property investor mainly holding prime commercial assets in Hong Kong and Singapore. The company is the second-largest office landlord in Hong Kong with a portfolio of centrally located assets totalling 4.1 million square feet of office space along with 0.6 million square feet of retail space. It also holds 1.6 million square feet of prime office space in Singapore. Rental income accounts for about 75 percent of the operating profit, with most coming from Hong Kong. Property development projects in Singapore, Southeast Asia and China contribute the rest. The company was founded in 1889 and is dual-listed on the London Stock Exchange with a secondary listing on the Singapore Exchange. It is 50 percent owned by Jardine Matheson Holdings.
Leonardo SpA Az nom Post raggruppamento
Leonardo is one of the largest European defence firms, with 30 percent of its shares owned by the Italian government. The group’s divisions include helicopters; defence, electronics and security systems (DES); and aeronautics. The helicopter division serves both military and civil markets through AgustaWestland. DES has access to the US defence market through the DRS subsidiary. The aeronautics division cooperates in international programs such as Eurofighter Typhoon, F-35 and the new Tempest, and supplies aerostructures to large commercial aircraft programs.
VMware Inc Class A
VMware is an industry titan in virtualising IT infrastructure and became a standalone entity after spinning off from Dell Technologies in November 2021. The software provider operates in three segments: licences; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. VMware entered into a definitive agreement to be acquired by Broadcom for USD 61 billion. The boards of both companies have unanimously approved the terms of the deal, which includes a clause that allows VMware to actively pursue alternative proposals from other potential suitors until July 5. There are few organisations such as Nvidia, Cisco, HPE, Intel or cloud providers that may be interested in VMware's capabilities, and this flexibility was important for VMware shareholders. Recent increased scrutiny of large technology acquisitions can cause risk and can be responsible for the delta between VMware's shares trading more than 10 percent below the deal price. VMware cancelled its first quarter earnings call and suspended its fiscal year 2023 guidance due to the pending deal.
Worst Performers
Warner Bros. Discovery Inc Ordinary Shares - Class A
Warner Bros. Discovery, the result of combining two large media firms, is one of the largest media firms in the world with tremendous scale and reach. The new company owns some of the biggest global networks including HBO, Discovery, CNN and TLC, plus well-known franchises like Superman, Rick and Morty, and Game of Thrones.
Warner Bros. Discovery reported first-quarter results that reflect only the Discovery side. While the Discovery business posted decent top-line growth, the focus has already shifted to the new combined firm. Discovery+ added 2 million new direct-to-consumer (DTC) subscribers in the quarter and HBO Max added 3 million, meaning that the new firm ended the first quarter with over 100 million streaming customers across its platforms. The combined net adds were relatively strong, given that market leader Netflix lost 200,000 subscribers in the same quarter.
With the WarnerMedia merger completed, management discussed Warner’s first-quarter results at AT&T and plans for the firm. AT&T reported only 2.5 percent year-over-year revenue growth in its Warner segment, including 16 percent growth in the DTC (mostly HBO) business. Warner’s operating income declined 35 percent from a year ago on higher marketing and programming investments. CFO Gunnar Wiedenfels expressed disappointment in the first-quarter results, particularly the drop in operating profit and cash flow.
RingCentral Inc Class A
RingCentral is a unified communications as a service. RingCentral’s unified communications platform replaces on-premises private branch exchange (PBX) phone systems, which support voice-only desktop phones, with its cloud phone system. The software allows businesses to communicate and collaborate all on one platform across various device types.
As an increasingly mobile workforce requires greater flexibility in business communications, the firm’s offerings become more critical. In a go-to-market model that focuses on leveraging channel partners such as Avaya and Mitel, RingCentral has gained first access to an on-premises PBX install base of over 210 million of these seats. It is likely that these partnerships allow RingCentral a powerful advantage over competitors in winning a significant portion of the legacy install base. The long-term growth projections are supported by increased seat penetration, expansion of enterprise adoption and development of its international presence.
Paramount Global Class B
Paramount Global is the rebranded recombination of CBS and Viacom that has created a media conglomerate with global scale. Paramount Pictures produces original motion pictures and owns a library of 2,500 films, including the Mission: Impossible and Transformers series. Paramount operates a number of streaming services, most notably Paramount+ and Pluto TV.
Paramount posted a decent start to an already turbulent 2022 as Paramount+ and Pluto delivered strong growth, with 6.8 million net subscriber additions and a 3.1 million increase in monthly active users, respectively. The growth at Paramount+ was impressive given the losses at Netflix this quarter.
While ad-supported tiers for subscription streaming services have gained media attention with the recent revelation that Netflix may enter the market, the completely ad-supported model like Pluto and the Roku Channel continue to gain users and improve monetisation. Management noted 80 percent of Pluto viewers also pay for a streaming service.
Just Eat Takeaway.com NV
Just Eat Takeaway operates an online marketplace that connects restaurants with users in Europe and North America. The company operates mainly as an order-only marketplace, although it also offers last-mile delivery services. The company is the result of the merger of Just Eat Plc and Takeaway.com NV in early 2020. The company had close to 60 million active users on its platform generating revenue of about EUR 2 billion and a gross merchandise value of EUR 13 billion. Excluding the US after its recent acquisition of Grubhub, the company’s largest geographical presence by revenue is in the UK, Germany, Canada and the Netherlands.
Uber Technologies Inc
Uber Technologies is a technology provider that matches riders with drivers, hungry people with restaurants and food delivery service providers, and shippers with carriers. The firm's on-demand technology platform could eventually be used for additional products and services, such as autonomous vehicles, delivery via drones, and Uber Elevate, which, as the firm describes, provides "aerial ride-sharing." Uber Technologies is headquartered in San Francisco and operates in over 63 countries with over 110 million users that order rides or foods at least once a month. Approximately 76 percent of its gross revenue comes from ride sharing and 22 percent from food delivery.
With the market disappointed with guidance from peer Lyft, Uber's shares have been dragged lower despite the firm’s solid first-quarter results and second-quarter guidance. Also, Uber now expects to generate free cash flow for the full year. The strengthening of Uber’s mobility segment, the availability of drivers, continuing growth in delivery, and an overall increase in usage of Uber’s platforms by consumers continue to drive expanding margins, making Uber as an attractive investment.
Uber’s network effect remained intact, as indicated by improvements on the supply and demand sides of the platform. The firm’s driver count is now higher than at any point since the pandemic. On the demand side, growth in users (up 17 percent year over year) and trips (up 18 percent, which indicates another 1 percent increase in trips per user), display the return of riders and continuing growth in delivery requests. In addition, with the recovery in mobility and an increase in delivery options, Uber’s gross bookings per trip increased 8 percent from last year.
Outlook
There’s no use sugarcoating how badly the second quarter played out for most investors—for investors with goals in mind (which is the majority) it may feel like two steps forward and one step back. And as the second half of the year begins, attention is likely to continue surrounding the inflation threat and a potential economic recession. Behaviourally, this is an important time to remain grounded principally.
Stocks and bonds offer different mechanics, performing differently in various market environments and making them ideal core assets for the majority of investors. Further, following recent losses, the valuations for both stocks and bonds have improved, which is a broad positive that will help investors in the next chapter of their investment journey.