Saxo Morningstar High Dividend EUR Q1 2022 commentary
| Instruments traded | Stocks |
| Asset classes | Global equities (excluding emerging markets) |
| Investment style | High-quality stocks offering attractive dividends |
| Dividend yield | 4.54% |
| Quarterly return | 3.01% (net of fees) |
| Annualised volatility (since inception) | 18% |
Market overview
At a Glance
- Equities and bonds, which often move in opposite directions, both finished in the red—an occurrence not seen since the first quarter of 2018.
- Commodity prices surged, with oil finishing up 33 percent. Energy-related assets also performed well.
- Stocks with high exposure to energy companies managed better, while emerging markets had a difficult quarter.
- Bonds had their worst quarter in 20 years, especially for longer-dated bonds, amid high inflation and rising interest rates.
Important Perspective
From the opening days of 2022, investors were taken on a wild ride during a first quarter that featured wide swings in stock, bond and commodity markets around the world. Stocks took a dive as the markets reassessed the potential of the Federal Reserve setting out a more aggressive path for interest rate hikes to help curb inflation, which hit a 40-year high. In a knock-on effect of rising yields, some of the stock market’s strongest performers in recent years saw share prices fall sharply.
Rising inflation and the invasion of Ukraine were the primary drivers of the pullbacks. For consumers, inflation is increasing faster than wages and is putting pressure on spending plans. Many businesses are facing higher costs for materials, and the war in Ukraine put additional pressure on supply chains that had only just started to untangle in the wake of the COVID crisis. Higher energy prices ranked among the most visible threats. The price for oil rose above $100 per barrel of West Texas Intermediate crude—up around 70 percent from a year ago. The Consumer Price Index (CPI), a key measure of inflation, jumped in the developed markets, with US CPI hitting 7.9 percent in the 12-month period ending February 2022. In response, central banks announced the first of what they anticipate will be several interest rate hikes to come this year.
Stocks fell heavily, but made a late recovery, marking the first quarterly loss since the COVID pandemic shook up markets in early 2020. Value-oriented stocks posted their best quarter of relative performance compared to their growth equivalents since the depths of the dot-com bubble in 2002.
Communications services, consumer discretionary and technology were the worst-performing sectors, while energy surged. Weak stock markets in Germany and Italy held back Europe, while commodity producers helped markets in Australia and the United Kingdom post gains.
Emerging markets had a difficult quarter. Russian stocks, which were 3.5 percent of the index to start the year, became untradeable after the invasion of Ukraine. Chinese stocks sold off for a combination of reasons, including worries about a COVID spike, an economic slowdown and a broader reassessment of geopolitical risk. Emerging market debt also fell for similar reasons.
Portfolio performance (net of fees)
| Jan | 0.7% |
| Feb | -0.2% |
| Mar | 2.6% |
| Inception (Jul 2018) | 41.54% |
Top 10 portfolio holdings (as of 31/03/2022)
| Name | Weight (%) |
| ING Groep NV | 4,42 |
| Canadian Imperial Bank of Commerce | 3,96 |
| Computershare Ltd | 3,76 |
| Huntington Bancshares Inc | 3,75 |
| Microsoft Corp | 3,67 |
| Genuine Parts Co | 3,47 |
| Roche Holding AG | 3,32 |
| McDonald's Corp | 3,31 |
| BCE Inc | 3,28 |
| AGL Energy Ltd | 3,27 |
Top performers
AGL Energy Ltd
AGL Energy is one of Australia's largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states—about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the Australian Securities Exchange. AGL Energy directors knocked back a slightly improved takeover offer from the Brookfield consortium of AUD 8.25 per share (up from AUD 7.50 per share initial proposal). Brookfield consortium walked away after the latest rejection.
The world was already scrambling for energy before the tragic events in Ukraine and the sanctions on Russia. Now global prices for coal and gas have risen to extreme levels, which puts upwards pressure on Australian electricity prices.
A year ago, the market got carried away with fears that new renewable energy supply was depressing electricity prices and that this would continue indefinitely because of ambitious government plans to decarbonise. Gas prices remain an important driver of electricity prices, and rising gas prices are likely to support electricity prices.
Computershare Ltd
Computershare has grown via global acquisition to become the world's leading provider of share registry services, constituting around 60 percent of group EBITDA. The remaining 40 percent largely comprises mortgage administration services in the United States and United Kingdom. Around a third of group EBITDA is generated by interest on client-owned cash balances, or margin income, which is exposed to interest rate movements.
BAE Systems PLC
BAE Systems is a British global defence company. BAE has a dominant position in the UK, is a top-six supplier to the US Department of Defense, and has a strong presence in key defence markets (e.g., Saudi Arabia and Australia). Their exposure to programmes is well diversified. BAE derives 45 percent of sales from services and support and 35 percent from major programmes such as the F-35 Lightning II and Eurofighter Typhoon fighter jets. The balance of sales is derived from electronic systems and cyber intelligence.
Compass Minerals International Inc
Compass Minerals produces two primary products: salt and specialty fertilisers. Compass' salt products are used by industrial and consumer end markets. The firm also sells sulphate of potash, which is used by growers of high-value crops that are sensitive to standard potash. Compass is expanding its portfolio and plans to enter the fire-retardant market, with its magnesium chloride–based product used to combat forest fires. The company also plans to enter the lithium market. Compass will produce magnesium chloride and lithium as by-products from its sulphate of potash operation. On 31 March President Joe Biden issued a memorandum that announced the US would help fund the development of US production of battery raw materials, including lithium, through the Defense Production Act. While there were few specific details, there can be a few small, albeit positive, ramifications for US lithium producers.
Despite a more favourable view from the US government, lithium project development typically takes 5 to 10 years to bring a new project into production.
Enterprise Products Partners LPEnterprise Products Partners is a master limited partnership that transports and processes natural gas, natural gas liquids, crude oil, refined products and petrochemicals. It is one of the largest midstream companies, with operations servicing most producing regions in the lower 48 states. Enterprise is particularly dominant in the NGL market and is one of the few MLPs that provide midstream services across the full hydrocarbon value chain. Efforts to expedite an increase in US capacity have yet to be addressed from a regulatory or market standpoint, as the next major LNG capacity expansion is expected in 2024.
Worst performers
Genuine Parts Co
Genuine Parts sells automotive parts (about two thirds of net sales) and industrial components. The company sells vehicle parts to commercial and retail customers through roughly 9,700 stores worldwide, most of which are independently owned. Its industrial unit, primarily operating under the Motion Industries banner in the United States, supplies bearings, power transmission, industrial automation, hydraulic and pneumatic components to maintenance, repair and OEM clients. While the pandemic has posed challenges for Genuine Parts, the situation has not altered the firm’s long-term strength. As a top distributor of automotive and industrial parts, Genuine Parts benefits from industry dynamics favouring its scale-enabled service levels. It is likely that the company will use its cost advantage to boost sales through its ability to offer a wide variety of parts on short order, building inventory and cost leverage as sales rise while fortifying brand value in a way subscale peers cannot economically replicate. Aftermarket auto-part retailers serve DIY and professional clients. The faster-growing latter category (more than 80 percent of segment sales for Genuine Parts) depends on high levels of part availability and rapid delivery to turn repair bays quickly. Both categories had benefited from rising miles driven and average vehicle age, along with low unemployment, and have shown resilience in past recessions. Genuine Parts (mostly via its NAPA brand) should benefit due to its infrastructure, which enables it to economically offer a vast catalogue with quick delivery.
Pendal Group Ltd
Pendal Group is one of Australia's largest active fund managers. The business is split across three segments: Australian-based Pendal Australia; UK-headquartered JO Hambro Capital Management, or JOHCM, and US-based Thompson, Siegel & Walmsley, or TSW. Pendal manages funds across several asset classes via a multiboutique structure. As of 31 December 2021, funds under management, or FUM, stood at AUD 135.7 billion.
Samsung Electronics Co Ltd GDR
Samsung Electronics is a diversified electronics conglomerate that manufactures and sells a wide range of products, including smartphones, semiconductor chips, printers, home appliances, medical equipment and telecom network equipment. About half of its profit is generated from semiconductor business, and a further 30-35 percent is generated from its mobile handset business, although these percentages vary with the fortunes of each of these businesses. It is the largest smartphone and television manufacturer in the world, which helps provide a base demand for its component businesses, such as memory chips and displays, and is also the largest manufacturer of these globally.
BASF SE
BASF SE is a chemical company with products spanning the full spectrum of commodities to specialities. In addition, the company is a strong player in agricultural crop protection. It operates through the following segments: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition and Care, Agricultural Solutions and Other. The Surface Technologies segment that derives the majority of revenue bundles chemical solutions for surfaces in the catalysts and coatings division. Its portfolio range serves the automotive and chemical industries and includes catalysts, batter material, automotive OEM, refinish coatings and surface treatment.
ING Groep NV
The merger of the Dutch postal bank and NN Insurance in 1991 created ING. Through a series of further acquisitions ING build up a global footprint. The 2008 financial crisis forced ING to seek government support—a precondition of which was that ING should separate its banking and insurance activities, which saw ING revert to being solely a bank. ING has market-leading banking operations in the Netherlands and Belgium, and a range of digital banks across Europe and Australia. Its global wholesale banking operation is primarily focused on lending.
Outlook
For all the attention on stocks, bond performance is perhaps the bigger story. The asset class saw its worst quarter in over 20 years. As stubbornly high inflation had central banks embarking on a path of more aggressive rate increases than was expected at the start of the year, bond investors are facing some of their worst losses in years. Hardest hit were longer-term bonds, which have the greatest sensitivity to interest-rate changes.
However, as we look ahead, it is important to remember that the future holds a wide range of possible outcomes and it continually defeats those who seek to make confident forecasts. In every situation, the right approach is to view the future probabilistically and think long term. Accepting some volatility is a pre-requisite for good returns in any market, but today’s market arguably requires greater care than usual. It is a pre-requisite to target the best assets for wealth creation and preservation, with careful sizing and smart diversification.