Don’t be scared by all-time highs in global equities, there’s likely more on the way

Yesterday, my colleague Glenn Freeman kicked off a mini-series we are running, conducting Rapid Fire interviews with managers across various asset classes. 

The goal is to put the first half of the year in perspective, understand what has worked, unpack the surprises, and consider the outlook for the rest of the year and beyond. 

Yesterday, the focus was on commodities, and that wire can be accessed below for anyone who missed it. 

Commodities

The four commodities that stand out in a potential supercycle

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Today, the focus is on global equities, one of the hottest investment spaces so far in 2024. James Tsinidis,  Partner and Portfolio Manager at Munro Partners, joined us to help unpack what has been happening. 

What has been the biggest driver of returns for global growth equities over the past six months?

For Munro, the biggest driver of performance this year to date (YTD) has been our High-Performance Computing (HPC) and Climate Areas of Interest.

Our HPC holdings include semiconductor chip design and fabrication companies like Nvidia (NASDAQ: NVDA) and TSMC (NASDAQ: TSM). Their recent success has been driven by artificial intelligence (AI) and, specifically, the immense ambitions of US tech companies like Google (NASDAQ: GOOGL), Amazon’s (NASDAQ: AMZN) AWS and Microsoft (NASDAQ: MSFT) to ensure they remain the leaders in this rapidly developing area.

While the commercial applications may not always be apparent to consumers, we believe that many profitable companies are effectively leveraging AI tools in their operations today. 

For example, Instagram has successfully reaccelerated user engagement by better organising user newsfeeds with the help of AI.

The Climate Area of Interest invests in companies enabling decarbonisation, including clean energy companies developing renewables, nuclear energy, and electricity grids. This area has been driven by the realisation that, for the first time in decades, power demand will increase, particularly in the US.

We believe that three main drivers are supporting this demand: data centre growth, electrification (including electric vehicles and electric heat pumps), and reshoring (to US from China). 

As demand for power rises, traditional baseload coal and gas-fired power is being decommissioned, and the grid is transitioning to more intermittent renewables. This transition is leading to considerable growth in the order backlog for utilities, grid equipment, and industrial companies that provide these solutions.

What have been the biggest surprises since January, and how have they impacted the way you invest?

Having lived through the internet and smartphone eras, we expected AI to be a big catalyst for the market and the stocks that are leveraged to the thematic. However, despite holding high conviction in this area, we have been surprised by the size and speed of the earnings upgrades that the HPC, data centre infrastructure and power companies have reported.

The reason is the immense ambition and corresponding capex plans that the hyperscale companies, including Amazon’s AWS, Microsoft and Google Cloud Partners, are putting in place. 

Not only has this shown up in the order books of semiconductor companies but also across the companies whose products and services are required to run these data centres. 

These include the power sector, many of which also fall into the Climate area, given they enable electrification.

Many of the companies that our team speaks with say that they have never seen such growth in their order books and remark that the last time this step change in demand occurred was around the introduction of fridges and air conditioning in homes.

What is the biggest risk to your outlook - what would cause you to change your investment thesis?

Over the long term, our funds’ performance is driven by the earnings per share (EPS) growth of the companies held in our funds, as opposed to what happens in the macroeconomy. So, if we are doing our bottom-up company research work and getting our EPS forecasts right, then we expect our fund performance to continue.

Over the short term, the biggest risk factor for structural growth portfolios is higher interest rates. 

While higher interest rates don't materially impact the EPS growth trajectory of our portfolio companies, the higher discount rate generally pressures the valuation multiples that the market is willing to pay, especially for growth stocks.

Munro's perspective is that interest rates and inflation have now peaked in this cycle. This outlook has historically been helpful for our portfolios as it enables stocks to align more closely to their EPS growth rates. 

While economic growth may slow down in a weaker macro environment, structural growth stocks can cope with that. In fact, a moderate slowdown has historically been a good period for our performance, because the "premium" for stocks that can grow in a weak environment increases.

Should we be wrong about inflation and interest rates peaking, we would adjust our investment thesis at a portfolio level and increase the level of cash or short positions in the fund to protect performance.

With global equity markets at all-time highs, how hard is it to find opportunities?

For the most part, stocks remain reasonably valued, and we are still finding a lot of opportunities to buy for the funds. Over multiple years now, small and mid-sized companies have lagged behind in the market rally due to investor emphasis focus on mega-cap tech. 

Likewise, the market has been cautious on companies leveraged to the consumer, including fintechs and some internet platforms. With many of these stocks trading at good valuations, we anticipate their shareholders will begin to see rewards as earnings continue to compound.

What is the biggest opportunity you see for the rest of the year - what has you most excited?

We’re anticipating that the stock market will broaden out, with stocks that have been overlooked now benefitting from a "catch-up" trade. As mentioned, many consumer-leveraged stocks have been overlooked thus far in 2024. We anticipate the HPC and Climate areas to drive performance. We see multi-year earnings tailwinds for the companies within these APIs.

As for the US election, we believe it will dominate headlines in the latter part of this year. We don't foresee that a victory for either Trump or Biden would significantly alter our companies’ earning trajectories. However, we need to be pragmatic and acknowledge that a political focus will be prominent in the remaining months of 2024.

So, we may exercise caution by increasing our cash holdings, ensuring we have liquidity available to capitalise if any of our stocks experience non-fundamental or transitory reason declines. 

Managed Fund

Munro Global Growth Fund

Global Shares

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