From the team at Freedom Asset Management
This week Freedom’s European institutional team was out in force with our Asian equity partners, SLAM and the top performing CIM Dividend Income Fund. According to the UK’s Citywire, this fund is ranked in the Top 3 Asian ex Japan equity funds over 1 year, 3 years, 5 years and 10 years. As a value fund, using a high dividend approach to find mis-priced stocks, it proves what most fund managers want to believe, that value wins out in the end.
(Source: Citywire’s website, performance as at 31/3/24)
Pictured: (L-R) Florian Wiedinger, Trudie Hustler and Freedom’s Bill Francis at the SLAM London offices
Both SLAM’s James Morton (Chairman) and Florian Wiedinger (CIO) were in travelling in Europe with Bill Francis, Sandrine Reynaud and Alan Walker. This week Sandrine is travelling with Florian to key cities in Germany, where we are particularly strong.
It is a quiet success story at Freedom that our institutional team has worked with this fund since 2016 when it stood at just under $100m in AUM. Today the fund stands at around $600m, the largest part of that client base being institutional clients brought by Freedom.
Markets un-muddle… and thank goodness for that
You may remember last week we were coming off the worst week in US stock markets since October 2022. And our key messages last week were:
- The Israel/Iran situation is not going to escalate for now – and is not as bad as some journalists and economic commentators would like you to believe
- US interest rates will stay higher for longer, but the idea that they are going to rise before the November Presidential election feels very unlikely
- Tech stocks can have occasional bad weeks and months, but you don’t want to have a portfolio without them
- If you have been sitting on the sidelines, now is a good time to top up.
So far that analysis looks correct and as you can see below, last week the S&P500 staged a strong recovery up over 2%+ from the prior week.
S&P 500 Index YTD
Source: SPX, CNBC, 28/4/24
What you can also see from this chart is that we are still 3% below the prior high at the beginning of April. So it is not too late for that top-up.
Weekly fund performance
A much happier week to report with Opus Global Freedom Fund c.+1.1% in US dollars, bringing the fund to c.+2.0% YTD. Likewise, Opus Global Growth posted a popping c.+2.6% week, bringing fund returns to c.+5.5% YTD.
Sterling thinking investors still carry the benefit of a c.3% Sterling depreciation YTD.
In our thematic piece below we look at Defence (or Defense, depending on your dictionary). This is an area we are looking at in our investment committee as a possible allocation for the Opus Global Freedom Fund.
Simon’s weekly piece laments Aston Villa latest performance and looks at history repeating itself.
Wishing you all a wonderful week ahead!
Adrian Harris
CEO & Director (Guernsey) / Senior Executive Officer (ADGM)
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“Defence in the spotlight”
By Charles Harris, Junior Investment Analyst
There are 3 numbers to remember – all of them big:
- US$1.341tr – NATO’s annual defence budget in 2023
- US$61bn – the US has just agreed to “send” these additional funds to Ukraine
- GBP75bn – Rishi Sunak pledge last week to rebuild the UK’s defence capability over a number of years
The global geopolitical arena is poised for significant shifts in the coming years, currently influenced by the ongoing conflicts in Ukraine and Gaza, as well as escalating tensions across the Asia-Pacific region.
As a result, global military expenditure reached a total of US$2.443tr in 2023 according to the Stockholm International Peace Research Institute (SIPRI), a 6.8% year-on-year increase, the steepest increase in over a decade.
(Source: SIPRI website, 28/4/24)
SIPRI also stated that this is the first time since 2009 that all 5 regions (Africa, Americas, Asia and Oceania, Europe and the Middle East) have increased their military expenditure simultaneously. Unsurprisingly SIPRI found that the regions that had witnessed the greatest increase in defence spending were Europe, the Middle East and Asia and Oceania.
As expected, due to the existential Russian threat on the Eastern European front, NATO spending increased to a total of US$1.341tr, equivalent to 55% of the world’s spending. Instability in the Middle East has led the regions military expenditure to grow 9% year-on-year, with Israel and Saudi leading the region in spending growth.
Last week’s announcement from UK Prime Minister Rishi Sunak, to increase the United Kingdom’s defence budget to 2.5% of annual GDP by 2030 (GBP87bn), is a perfect example of how conflicts are shaping future market growth. In a politically dangerous move for Sunak, part of this funding is coming at the expense of increases in health and education. The UK’s increased spending will go towards AUKUS, modernising nuclear deterrence, as well as replenishing missile and munition stocks.
(Source: UK Govt Press Release, 24/4/24)
Germany has also expressed its intent to expand its 2024 defence budget by 31% as it aims to meet the NATO defence spending guideline of 2% of GDP.
As you will all be aware, President Joe Biden signed a piece of security legislation last Wednesday, in which US$ 61bn of new funding for Ukraine was approved. The US Defence Secretary Lloyd Austin announced that the first US$ 1bn tranche will be delivering weapons such as Patriot missiles, artillery ammunition and drones. Austin also stated that among other equipment, Patriot missile interceptors will eventually be sent to Ukraine and will be manufactured by RTX Corp and Lockheed Martin Corp (both appear in figure 1 below).
(Source: Bloomberg, 26/4/24)
As advanced economies look to greater levels of defence spending to modernise military capabilities and alleviate unease amongst populations, the aerospace and defence industries have seen a drastic uptick in activity.
Figure 1: Largest defence companies by market cap
Source: Freedom Asset Management Research and Bloomberg, 28/4/24
A look at the biggest names reveals that there is only 1 listed defence name in the Top 10 that is British. The French entry, Airbus, obviously does other non-defence activities. By significantly increasing the commitment to the UK’s defence spending, Sunak hopes to increase the UK’s capabilities and reach in the defence industry – including stimulating growth on the London stock exchange. A glance down the PE ratios of these companies, shows that despite the significant tailwind for the industry, some of the key names are not on demanding multiples.
So outside of buying individual names, which we prefer not to do, how do you gain exposure to this sector?
We could not find any actively managed defence funds, at least not based in Europe, but unsurprisingly there have been some new ETFs that have popped up in the last 12 months.
Figure 2: Defence ETFs vs S&P500 index
Summarising the chart above, the 2 pure defence ETFs we found (and there are others), comfortably beat the S&P500 since Sept 2023. The S&P500 generated +15% and the defence ETFs generated between +28-33%. (Source: Bloomberg, 28/4/24)
On geopolitical matters and on price performance, this would seem to suggest that this is an area worth looking at in more detail – perhaps, sadly, the next megatrend.
Charles Harris
Junior Investment Analyst, based in Abu Dhabi
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Simon’s weekly piece, 29/4/24
“Into the ether…”
And in the blink of an eye, Villa have started to erase all the joy of this season by being … well… Aston Villa, and teasing a better ending. A loss to Chelsea means that Villa must rely on Spurs to give me a birthday and Christmas present, all rolled into one, and lose at least three of their remaining six games.
Last word on rates….
The markets are now not expecting a rate cut until November. This is, I believe, putting far too much emphasis on recent data and when, as recently as a month ago, everything was rosy on inflation. So things are not as pessimistic as the past few weeks suggest either.
From me, you still have a sub 3% target for the Feds preferred inflation gauge, the PCE. And though that means we won’t see the rate cuts/market sugar that many requested, it doesn’t matter from a GDP perspective over the year, as we will still see good growth, especially on a comparative basis with other parts of the world; so equity valuations still appear ‘good value’ and with recent declines, buying opportunities exist.
Exogenous factors aside, my strategies should do double digits in 2024 and beat the broad equity indices.
And because the word has started appearing again… I think the ‘stagflation’ worry is unjustified: the slowdown in 1Q growth looked like a ‘wobble’ at the time, and the rebound from it is already coming through in the economic data. Expect a modest upgrade in the 2nd & 3rd estimates, followed by stronger growth in 2Q. Why? Because although financial stresses on households are certainly rising, demand signals remain strong (this week, March personal spending +0.9%, new home sales +8.3%m, pending home sales +3.4%), and there’s no sign yet of labour markets weakening significantly.
And in the corporate world…
US corporate results went a long way to showing that rates are manageable and indeed growth in earnings and sales is very possible. Equities are very fairly valued and in many places a screaming “buy” signal. And if corporates do need help the Fed does have a loaded gun, if needed, and can provide rates cuts almost as desired.
History repeats…
Britain was in a mess. It had just suffered a costly and unwanted divorce from its most important trading partners, putting it under extreme financial pressure. Now it was short of allies. Sterling had been punished hard as the Bank of England had been unable to resist pressures stemming from Britain’s unsustainable debt position. In fact, public debt was the highest it had ever been at 200%+ of GDP, and Britain’s creditors were driving the hardest of bargains.
But so much needed to be done: infrastructure was crumbling, and more housing was desperately needed as for the last seven years very few new homes had been built despite a 5% rise in the population. Unemployment was rising and strikes were common.
Supply chains kept buckling. Go down to the shops and you’d find less coffee, sugar, fish, flour, fruit and even tobacco for sale. Even if you could find them, prices had risen significantly over the past few years.
Meanwhile, a government elected on the promise of national reform and rejuvenation was looking increasingly shop-worn, shorn of some its senior leaders and divided on policy.
To make matters even bleaker, the much-loved but aging monarch was ill. Cancer, it turned out.
It isn’t today it is the UK of the early 1950s. At the lowest of ebbs: bombed out physically, financially, diplomatically and militarily, ruined and humiliated by its main ally. A victor in rags.
The similarities between then and the UK are huge and yet the 1950s was a period of incredible UK Plc performance that propelled it to a position of importance again. I am planning a “big reveal” on this in the near future.
Ukraine update –Day 796 of Mr. Putin’s 3-day war…
796 days of the horror continues in Ukraine… Perhaps the “greatest” orange president and MTG are the only hope Mr. P has at escaping this with any dignity at all. Ukraine is now funded militarily through the end of 2024 there must now be significant internal pressures inside Russia coming to bear even if they are discussed far from public view. This goes some way to explain the redistribution of “resources” inside Russia with a wave of nationalisations and confiscations.
And “finally…”
Last week after the nightmare of market declines two weeks ago, I wrote that “I remain extremely positive about the world economy” well the “bounce” back was quite strong.
And the final sentence … it is hard to express my gratitude at the trust and confidence you have placed in me over the years. I am humbled.
Best
Simon Fentham-Fletcher