Munro: Share prices will follow earnings growth even if markets wobble over short term

The Fund returned 17% net of fees over the year to February 28.

Towards the end of 2024, it rotated some of its holdings to take profits in huge semiconductor winners like Nvidia (NASDAQ: NVDA) while adding to positions in the infrastructure, security and energy-demand areas. 

In this wire, Moore explains why he expects markets to recover from recent trade war wobbles as investors, again, start to focus on corporate profit growth and structural winners linked to the boom in artificial intelligence.

Trade wars versus structural growth winners

The Fund targets holdings of between 30 and 50 companies, and it can take short positions to provide some protection if the market falls. Around two-thirds of its investments are in US businesses, with the remainder across Asia, Europe, and cash.  

"Global markets have experienced fluctuations due to headline concerns like tariff issues," says Moore. 

"We remain confident in the earnings growth potential of the companies within our portfolio and believe that the recent market volatility has not altered the fundamental opportunity."

Adapting to new dynamics

One company the Fund owns is German manufacturer Rheinmetall, which has more than doubled in value this year as investors bet it's a winner from the changing security landscape in Europe. 

Moore says the Fund has defence spending or security as an area of interest (AoI) given US President Trump has forced European and other nations to massively lift spending on defence as a percentage of their gross domestic products.

"Security [as an AoI] focuses on defence spending globally, as well as areas such as spending on public safety," he says. 

Moore adds that the Fund recently took some profits on areas such as high-performance computing to broaden out its bets for capital growth into areas such as infrastructure and security.

"We have also added to our climate areas of interest, where we see accelerating earnings growth opportunities," he says. "One such example in our climate AoI is Constellation Energy (NASDAQ: CEG), which is the largest nuclear operator in the US. 

"Constellation Energy has a long runway of growth, and has the ability to expand margins over time - two important characteristics we look for in a growth company."

Focus on earnings growth

Despite worries that an ongoing trade war will slow global economic growth, Moore says he thinks the best corporates can still deliver earnings growth in 2025. 

He says this is partly because global interest rates are stable or declining, inflation is under control, and central banks can support economies if needed. Moreover, many businesses still have the potential to grow sales or cut costs via efficiencies thanks to the boom in AI-related products and services. 

"We believe Artificial Intelligence advancements will continue during 2025, as evidenced by the capex intentions of the large hyperscale cloud companies Alphabet, Amazon, Meta and Microsoft," he says. 

"These companies all signalled their intention to spend more in 2025 to build out their AI offering. In our view, this is positive for the earnings growth of several of our AoI, particularly in high-performance computing and connectivity. 

"Our climate AoI will also benefit from the increased need to deploy power for these AI applications to be used by consumers."

Moore adds that the growing emergence of AI tools and US President Trump's agenda of deregulation, lower corporate tax rates, and onshoring industry back to the US could all boost productivity. 

"Large language models now allow companies to deploy AI to many different industries and applications all around the world," he says. 

"AI is distinctly different from previous technology cycles because it can be applied to so many different industries, and the total addressable opportunity is significant."

Despite reducing its exposure to semiconductor businesses, the Fund still retains significant exposure to this third theme as it expects it to still be a long-term winner, according to Moore.

"One of the big contributors to Fund performance over the last three years has been our high-performance computing AoI, which is focused on semiconductor companies that enable AI applications to exist," he says.

"To create the AI applications that consumers and businesses will use, it is important to use the highest performing semiconductors as part of the compute mix. AI applications demand a more complex source of compute power, which only the high-end semiconductors can provide, which is where companies such as Nvidia play an important role."

Magnificent Seven still tipped to do well

Moore says the Fund has reduced its exposure to the Mag7 group of companies - Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Meta (NASDAQ: META), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), Tesla (NASDAQ: TSLA), Apple (NASDAQ: AAPL)  - as they have performed strongly since the 2022 bear market, but continues to believe they'll play a key role in the portfolio. 

"Importantly, the large hyperscaler companies Alphabet, Amazon, Meta and Microsoft have all increased their capex spending plans, which is positive for the earnings growth of our portfolio holdings," he says. 

"For example, we still believe Nvidia is a key AI enabler and that there is significant earnings upside optionality to come from emerging AI opportunities such as healthcare and robotics. 

"We remain bullish on Meta for its ability to leverage its open-source AI models to billions of users around the world, as well as the nearer-term sustainable growth in the advertising business at a mid-teens year-on-year growth rate. 

"Amazon continues to execute on its margin expansion opportunity, which we believe will continue to drive earnings. Specifically, the retail business now benefits from a more efficient fulfilment footprint, as well as healthy growth in the high-margin advertising business."

He adds the Fund also owns blue-chip growth stock Microsoft and software star ServiceNow (NASDAQ: NOW) as part of its digital enterprise theme. 

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