Saxo Morningstar Moat USD 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:

• Millicom International Cellular SA SDR
  Millicom offers wireless and fixed-line telecom services primarily in smaller, less congested markets or in less developed countries in Latin America. Countries served include Bolivia (100% owned), Nicaragua (100%), Panama (100%), El Salvador (100%), Guatemala (100%), Paraguay (100%), Colombia (50%), Costa Rica (100%) and Honduras (67% but not controlled or consolidated in the firm's financial statements). The firm's fixed-line networks reach nearly 13 million homes, while its wireless networks cover about 120 million people. Increasingly, Millicom offers a converged package that may include fixed-line phone, broadband and pay television in conjunction with wireless services. The firm plans to carve out its infrastructure assets and mobile financial services business in 2023.
  
  
• The Scotts Miracle Gro Co Class A
  Scotts Miracle-Gro is the largest provider of gardening and lawncare products in the United States. The majority of the company's sales are to large retailers that include Home Depot, Lowe's and Walmart. Scotts Miracle-Gro can sell its products at a higher price point than its competition because of a well-recognised portfolio of brands that include Miracle-Gro, Roundup, Ortho, Tomcat, and Scotts. Scotts is also the leading supplier of cannabis-growing equipment in North America through its Hawthorne business. There is an expectation that US home sales will begin to rebound in 2024, as lower mortgage rates and home prices improve affordability and encourage buyers back into the market. After a challenging 2023-24, there is an expectation that home price appreciation will return together with repair and remodel spending growth normalising at about a 5% annual rate.
  
  
• 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.
  
  
• Rocket Companies Inc Ordinary Shares Class A
  Rocket Companies is a financial services company that was originally founded as Rock Financial in 1985 and is currently based in Detroit. Rocket Companies offers a wide array of services and products but is best known for its Rocket Mortgage business. The company's mortgage lending operations are split between its direct-to-consumer lending, which sees borrowers accessing the company's lending arm directly through either its mobile app or website, and its partner network where mortgage brokers and other firms use Rocket's origination process to offer loans to their customers. The company has rapidly gained market share in recent years and is now the largest mortgage originator in the U.S., as well as the servicer for more than 2 million loans.
  
  
• Elekta AB Class B
  Sweden-based Elekta develops, manufactures and distributes treatment planning systems for neurosurgery and radiotherapy, including stereotactic radiosurgery and brachytherapy. The company's installed base of more than 5,000 linear accelerators and software is used in more than 6,000 hospitals globally. The company's sales are evenly distributed across geographies, with North and South America accounting for 29%; Europe, the Middle East and Africa accounting for 37%; and Asia-Pacific contributing the remainder. While the Americas and Europe, Middle East and Africa regions both saw sales growth, the impact of coronavirus infections in China slowed installations and resulted in a decline of 3% for the Asia-Pacific region. Despite the continuing COVID-19 limitations, solutions grew 12% year over year, and Elekta’s installed base is now approximately 7,100.

Worst performers:

• Lyft Inc Class A
  Lyft is the second-largest ride-sharing service provider in the U.S., connecting riders and drivers over the Lyft app. Lyft recently entered the Canadian market in an effort to expand its market outside the U.S. Incorporated in 2013, Lyft offers a variety of rides via private vehicles, including traditional private rides, shared rides and luxury ones. Besides ride-share, Lyft also has entered the bike- and scooter-share market to bring multimodal transportation options to users.
  
  
• Compass Minerals International Inc
  Compass Minerals currently produces two primary products: salt and specialty potash fertiliser. The company's main assets include rock salt mines in Ontario, Louisiana and the United Kingdom, and a salt brine operation at the Great Salt Lake in Utah. Compass' salt products are used for de-icing and also by industrial and consumer end markets. The firm also sells sulfate 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 sulfate of potash operation in Utah.
  
  
• U.S. Bancorp
  U.S. Bank is a commercial bank established in 1863 and headquartered in Minneapolis, Minnesota that offers business, consumer, corporate and commercial banking, payment services, wealth management, and investment services. The bank also provides lending and depository services, cash management, capital markets, and retirement planning services. The bank's lending services include traditional credit products, lease financing, mortgage lending, import/export trade, asset-backed lending, and agricultural finance among others. U.S. Bank operates as a subsidiary of U.S. Bancorp.
  
  
• 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 stabilize 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.
  
  
• Altice USA Inc Class A
  Altice Europe acquired privately held U.S. cable company Suddenlink in 2015 and Cablevision in 2016. Suddenlink's networks provided television, internet access and phone services to roughly 3.5 million U.S. homes and businesses located primarily in smaller markets, with major clusters in Texas, West Virginia, Idaho, Arizona and Louisiana. Cablevision provided comparable services to about 5.5 million homes and business in the New York City metro area. Altice Europe spun off Altice USA. which includes both the Suddenlink and Cablevision operations, to shareholders in 2018. Altice USA showed some improvement during the fourth quarter, but still posted a generally weak end to a difficult 2022. New CEO Dennis Mathew used the earnings release to signal significant changes ahead, appointing four new senior executives. Total revenue declined 4.7%, excluding the nonrecurring revenue recorded a year ago, as Altice’s customer base was 3% smaller at the end of 2022 than the year before and fewer customers took multiple services. Management said customer churn is coming down thanks to investments in customer service and the Optimum rebranding across the company. 
  
   

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.