Saxo Morningstar Moat CHF Q2 2021 commentary

Market overview

Stocks and bond markets posted broad gains in the second quarter, and volatility ebbed, as investors navigated the cross-currents of a global economy emerging from the coronavirus pandemic. Stocks in particular were driven by the dynamics of a recovering economy: the reality of higher inflation, a mixed picture on employment, and continued support from central banks. This shift came as the Federal Reserve indicated in June that it may raise rates somewhat sooner than expected, albeit not likely until 2023. 

A wide divergence in sector performance during the first quarter narrowed in the second, with all but the utilities sector posting gains. By the end of the second quarter, one of the most dominant trends from late 2020 and the first quarter began to fade: the outperformance of cash-flow producing value stocks over popular growth stocks. 

Still, with central banks (and especially the Federal Reserve) still injecting enormous stimulus, markets weren’t spooked. Some factors stayed constant from earlier developments: resurgent economic activity boosting the price of oil, and in turn, energy stocks. In fact, oil prices rose 20% in the quarter and 94% over the past year. 

In this context, emerging markets showed resilience to a regulatory clampdown in China towards mega-tech companies, with the broad emerging-markets basket matching developed markets for the quarter.  

In the bond market, following a rough first three months of 2021, where prices were hit by fears of rising inflation, investors returned in the second quarter. Updates from central banks influenced bond market participants, with a return of investor interest resulting in a reversal of some of their lost ground—with the U.S. faring better than European equivalents. In riskier fixed-income markets, high-yield bonds continue to outpace core and corporate counterparts. 

The currency market also saw increased volatility, with the U.S. dollar perking up in June after sharply declining for most of the quarter. To the contrary, the Japanese yen, British pound, Euro and Australian dollar all saw relative strength but weakened as the quarter ended. The Fed’s hinting at higher rates and a more aggressive stance on inflation was a telling development here. 

Portfolio performance (net of fees)

Top 10 portfolio holdings (as of 30/06/2021)
39% of total portfolio

Top Performers (Below performance figures are total return Q2):

• Hugo Boss AG. Share price went up 37.2% and according to Morningstar proprietary analysis, the stock trades at a discount to fair value. 
  
  Hugo Boss is a German-based menswear apparel brand operating in the premium segment through its two brands, Boss and Hugo. The brand was founded in 1924 and Hugo Boss' sales are mainly menswear (90%). The company is globally present in 7,600 points of sale, with 62% of revenue generated in the European market, 20% in the Americas, 15% in Asia-Pacific, and 3% from licenses. It generates over 60% of sales through own retail with over 1,000 stores globally.
  
  
• Core Laboratories NV. Share price went up 34.1% and according to Morningstar proprietary analysis, the stock trades at a deep discount to fair value.
  
  Core Laboratories is an oil-services company that helps oil and gas companies better understand how to improve production levels and economics with core and reservoir analysis. Additionally, the company sells a number of products helping its customers to maximize production levels from their oil and gas assets. The company operates in more than 50 countries and has more than 5,000 employees.
  
  
• Biogen Inc. Share price went up 22.7% and according to Morningstar proprietary analysis, the stock trades at a slight discount to fair value. 
  
  Biogen and Idec merged in 2003, combining forces to market Biogen's multiple sclerosis drug Avonex and Idec's cancer drug Rituxan. Today, Rituxan and next-generation antibody Gazyva are marketed via a collaboration with Roche. Biogen also markets novel MS drugs Plegridy, Tysabri, Tecfidera, and Vumerity. 
  
  In Japan, Biogen's MS portfolio is co-promoted by Eisai. Hemophilia therapies Eloctate and Alprolix were spun off as part of Bioverativ in 2017. Biogen has several drug candidates in phase 3 trials in neurology and neurodegenerative diseases and has launched Spinraza with partner Ionis. Aduhelm was approved as the firm's first Alzheimer's disease therapy in June 2021.
  
  
• Alexion Pharmaceuticals Inc. Share price went up 19.1% and according to Morningstar proprietary analysis, the stock trades at a slight discount to fair value. 
  
  Alexion Pharmaceuticals specializes in developing and marketing drugs for rare, life-threatening medical conditions. Its blockbuster product, Soliris, is approved for paroxysmal nocturnal hemoglobinuria (PNH), atypical hemolytic uremic syndrome (aHUS), generalized myasthenia gravis (gMG), and neuromyelitis optica spectrum disorder (NMOSD). Next-generation Ultomiris is approved in PNH and aHUS. Strensiq and Kanuma target ultrarare metabolic diseases. 
  
  Alexion's pipeline targets rare diseases with high unmet need in hematology, nephrology, metabolic diseases, neurology, cardiology, and other areas.
  
  
• Wesco International Inc. Share price went up 17.8% and according to Morningstar proprietary analysis, the stock trades at a discount to fair value. 
  
  Wesco International is a value-added industrial distributor that has three reportable segments, electrical and electronic solutions, communications and security solutions, and utility and broadband solutions. The company offers more than 1.5 million products to its 125,000 active customers through a distribution network of 800 branches, warehouses, and sales offices, including 42 distribution centers. Wesco generates 75% of its sales in the United States, but the company has a global reach, with operations in 50 other countries.
  
   

Worst Performers:

• Sabre Corp. Share price went down 16.5% and according to Morningstar proprietary analysis, the stock trades at a discount to fair value.
  
  Sabre holds the number-two share of global distribution system air bookings (40.9% as of the end of 2020 versus 38.8% in 2019). The travel solutions segment represented 88% of total 2020 revenue, which was split evenly between distribution and airline IT solutions revenue. The company also has a growing hotel IT solutions division (12% of revenue). Transaction fees, which are tied to volume and not price, account for the bulk of revenue and profits.
  
  
• Uber Technologies Inc. Share price went down 8.88% and according to Morningstar proprietary analysis, the stock trades at a deep discount to fair value. 
  
  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 refers to it, 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% of its gross revenue comes from ride-sharing and 22% from food delivery.
  
  
• Link Administration Holdings Ltd. Share price went down 4.03% and according to Morningstar proprietary analysis, the stock trades at a deep discount to fair value. 
  
  Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. 
  
  Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model's capital-light nature means cash conversion is relatively strong.
  
  
• Hong Kong Land Holdings Ltd. Share price went down 3.92% and according to Morningstar proprietary analysis, the stock trades at a deep discount to fair value. 
  
  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% of the operating profit, with most coming from Hong Kong. Property development projects in Singapore 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%-owned by Jardine Matheson Holdings.
  
  
• Orange SA. Share price went down 3.71% and according to Morningstar proprietary analysis, the stock trades at a deep discount to fair value. 
  
  Orange is the incumbent telecom operator in France, formerly known as France Telecom. The company operates fixed and wireless businesses in France, where it is the market leader ahead of Iliad, Bouygues and SFR. Orange also has fixed and wireless (convergent) operations in Spain, Poland, Belgium, Luxembourg and Central Europe (Romania, Slovakia, Moldova). Around 15% of revenue comes from emerging African markets, where the company only operates wireless networks and 20% comes from the enterprise segment, which serves companies with more than 50 employees in France and internationally.
   

Outlook

Over the past 12 months, stocks are meaningfully higher, with some key markets hitting a new record high on the last day of the quarter. To really hammer home the post-pandemic rally, take U.S. stocks for example, which are up 97% from the 2020 low set on March 20, 2020. This is obviously good news for those with a higher risk tolerance that have enjoyed the high returns, but it has also seen the risk appetite and return expectations of many investors rise to worrying levels. Some investor surveys even suggest participants now expect 15%+ returns every year for the next five years, which is extraordinary by historical norms. Like gravity, investors should be reminded that long-term asset prices are inevitably a reflection of the fundamentals beneath it.