Saxo Morningstar High Dividend EUR Q1 2023 commentary

Market overview

Quarter at a glance

• Stocks and bonds delivered positive performance for the quarter. despite concerns of a banking crisis
  
  
• Economic data continues to shape expectations. with interest rates and banking stability among the top concerns for investors 

Important perspective

After a challenging 2022, stocks and bonds delivered positive performance during the first quarter of 2023. However. there were concerns about a banking crisis and continued interest rate speculation that took headlines.

The chief concern among many investors shifted from inflation to a liquidity crisis among regional banks, which began with the collapse of Silicon Valley Bank. While it escalated quickly, investors seemed convinced that central banks have contained the problem. so much of the stock market was able to weather the storm.

There were significant swings in expectations for central bank policy. Further interest rate rises were observed during the quarter, but at a slowing rate compared to the ones from 2022. 

At the sector level. the first quarter saw a reversal of the trends that dominated the market in 2022. Technology and communication services stocks were the best-performing ones during the first quarter of this year. Meanwhile, the energy and defensive sectors—generally the best performers during 2022—lagged in the first quarter. Developed-markets stocks also outperformed emerging-markets stocks, although both posted positive outcomes.  

Volatility in the bond market has remained at twice its historical level over the past four quarters, a notable occurrence for a market that most investors look to for stability. That said, bonds broadly produced positive outcomes in the first quarter. Longer-term government bonds—which are the most sensitive to changes in interest rates—performed particularly strongly, unwinding some of the losses from 2022. 

Portfolio performance (net of fees)

Top 10 portfolio holdings (as of 31/03/2023)

Top performers:

• Fresenius Medical Care AG & Co. KGaA
  Fresenius Medical Care is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of September 2021. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world's only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line. Positively, the coronavirus-related mortality concerns that have hampered results so much in recent years appear to be easing, but ongoing labour concerns look likely to continue cutting into operating margins in 2023. With ongoing transformational activities though, management aims to boost operating margins to between 10% and 14% by 2025.
  
  
• Intel Corp
  Intel is the world's largest logic chipmaker. It designs and manufactures microprocessors for the global personal computer and data center markets. Intel pioneered the x86 architecture for microprocessors. It was the prime proponent of Moore's law for advances in semiconductor manufacturing, though the firm has recently faced manufacturing delays. While Intel's server processor business has benefited from the shift to the cloud, the firm has also been expanding into new adjacencies as the personal computer market has stagnated. These include areas such as the Internet of Things, artificial intelligence, and automotive. Intel has been active on the merger and acquisitions front, acquiring Altera, Mobileye, and Habana Labs in order to bolster these efforts in non-PC arenas.
  
  
• Deutsche Post AG
  Provider of retail banking services. The company's range of simple, low-cost products and services ranging from payment transactions and deposit and lending business to bonds, investment funds, insurance policies and home savings contracts are offered to retail business with private customers and small and medium-sized companies.
  
  
• Holcim Ltd
  Holcim is a global manufacturer of construction materials such as cement, aggregates and concrete. The company is the result of a merger between Lafarge and Holcim, completed in 2015, which created a leader in the building materials sector. Holcim has a global presence, operating in over 70 countries with 72,000 employees. The group was more upbeat in its outlook for 2023 than peers, guiding for organic revenue growth between 3% and 5% and an over-proportional increase in profit. A dividend of CHF 2.5 has been proposed, an increase of 14% year over year, and confirms management's confident outlook.
  
  
• Microsoft Corp
  Microsoft develops and licenses consumer and enterprise software. It is known for its Windows operating systems and Office productivity suite. The company is organised into three equally sized broad segments: productivity and business processes (legacy Microsoft Office, cloud-based Office 365, Exchange, SharePoint, Skype, LinkedIn, Dynamics), intelligence cloud (infrastructure- and platform-as-a-service offerings Azure, Windows Server OS, SQL Server), and more personal computing (Windows Client, Xbox, Bing search, display advertising, and Surface laptops, tablets, and desktops). Consistent with broader revenue trends, several of Microsoft’s key growth levers showed decelerating growth both sequentially and year over year. Microsoft continues to engage in success campaigns to help customers optimise their workloads. Although these efforts provide a headwind to Azure growth in the near term, management believes these campaigns will moderate, which should reinvigorate Azure usage and revenue growth again.

Worst performers:

• British American Tobacco PLC
  Following the acquisition of Reynolds American, British American Tobacco is neck-and-neck with Philip Morris International to be the largest listed Global tobacco company--slightly larger than PMI on net revenue, but slightly smaller on total tobacco volume. British American's Global Drive Brands are Dunhill, Kent, Pall Mall, Lucky Strike and Rothmans, and it also owns Newport and Camel in the U.S. The firm also sells vapor e-cigarettes, primarily its Vuse brand, heated tobacco, with Glo, as well Velo modern oral tobacco products. The company holds 29% of ITC Limited, the leading Indian cigarette-maker.
  
  
• 3M Co
  3M is a multinational conglomerate that has operated since 1902, when it was known as Minnesota Mining and Manufacturing. The company is well known for its research and development laboratory, and it leverages its science and technology across multiple product categories. As of 2020, 3M is organised into four business segments: safety and industrial, transportation and electronics, healthcare, and consumer. Nearly 50% of the company's revenue comes from outside the Americas, with the safety and industrial segment constituting a plurality of net sales. Many of the company's 60,000-plus products touch and concern a variety of consumers and end markets.
  
  
• The Western Union Co
  Western Union provides domestic and international money transfers through its global network of about 600,000 outside agents. It is the largest money transfer company in the world and one of only a few companies with a truly global agent network. Western Union continues to experience revenue declines as it battles its way through difficult conditions, and the company is likely to remain under pressure in 2023 as management invests in an attempt to stabilise and grow the business. The company's core money transfer segment saw revenue decline 11%, or 9% when excluding currency impacts. The decision to exit Russia and Belarus reduced revenue by three percentage points. Management's guidance suggests margins will remain under some pressure in 2023 but move to a level much closer to the company's historical level after that.
  
  
• Huntington Bancshares Inc
  Huntington Bancshares is a regional bank holding company headquartered in Columbus, Ohio. The bank has a network of branches and ATMs across eight Midwestern states. Founded in 1866, Huntington National Bank and its affiliates provide consumer, small-business, commercial, treasury management, wealth management, brokerage, trust, and insurance services. Huntington also provides auto dealer, equipment finance, national settlement, and capital market services that extend beyond its core states.
  
  
• Roche Holding AG
  Roche is a Swiss biopharmaceutical and diagnostic company. The firm's best-selling pharmaceutical products include a variety of oncology therapies from acquired partner Genentech, and its diagnostics group was bolstered by the acquisition of Ventana in 2008. Oncology products account for 50% of pharmaceutical sales, and centralised and point-of-care diagnostics account for more than half of diagnostic-related sales.

Outlook

As the second quarter gets underway, the question facing investors (and central banks) is whether the banking scare will have further effect through the economy and cause a recession. Obviously, this is difficult to predict and remains a genuine risk. What is clear is that investors and central banks are watching closely, with the risk of further bank failures (and undesirable knock-on effects) weighed against a potentially friendlier interest-rate outlook.

The negative sentiment expressed towards banks has been reminiscent of the second quarter of 2008, when market participants sought for the next weakest financial institution. The Global Financial Crisis has left an indelible mark on the minds of investors and so it is not surprising that this experience is influencing the perspective of investors.

However, looking beyond sentiment, the differences between the current situation and 2008 are more noticeable than the similarities. This environment is extremely challenging for central banks and precarious for investors.

Turning to investment opportunities, the collapse of SVB and Credit Suisse is yet to create an unusually good investment landscape, so caution is warranted. While some of the best investment opportunities could emerge among the banks, a greater ‘margin of safety’ is required given the near-term risks.