March 12, 2021
It appears “new record” is somewhat the “new normal”.
In the US, the S&P 500 performance so far this year has been very strong. On Friday the index notched up its 20th record close for 2021. The Dow Jones Industrial Average also closed at a record high.
Remember how investors were getting nervy about rising bond yields just a month or so ago? Well over the past week, sentiment appears to have flipped. This is despite the US 10-year Treasury bond yield still hovering near one-year highs and almost doubling since January 1.
The point to make here is, reacting to short-term market gyrations is no way to achieve long-term wealth creation in equity markets.
Step back and stay focussed on the bigger picture.
What about that ship?
The Ever Given has motored out of the Suez Canal after initiating what was a worst-case scenario for global trade. The saga highlighted something we’ve been monitoring since late last year – increasing supply chain pressures.
Broadly speaking, across key industries, input cost prices have been rising, delivery times lengthening, new orders are accelerating, and inventory is tight.
Ultimately these pressures could be a driver for inflation, however, the greatest driver in this respect is excess savings from stimulus and underspending in 2020 combined with pent-up demand. In the US particularly, there’s a huge amount of ‘firepower’ that can be deployed as the country reopens.
Why does this matter for global equity investors? It goes back to those bond yields.
Inflation and rising economic activity puts upward pressure on bond yields and that has implications for high-flying ‘growth stocks’ in particular.
As we mentioned in our last fortnightly update, we think the bigger picture for bond yields is that they are on the rise.
Image: Suez Canal Authority
… And what about those chips?
Talking about supply chains, the global semiconductor chip shortage is showing no signs of slowing.
You may have heard about storms in Texas and earthquakes in Japan hitting semiconductor production, but again, there’s a bigger picture at play.
We’ve been investing in semiconductors for a number of years now because we recognised significant structural growth tailwinds.
The world is digitising, workloads are moving to the cloud and 5G will facilitate a whole host of developments like better handset experiences, connected cars and autonomous driving. All of this requires more and more semiconductors to process increasingly complex tasks.
COVID has pulled forward some of these trends – think consumption of online content, e-commerce and remote working.
This, combined with the rebound we are seeing in economic activity and a few supply issues, has resulted in the well-publicised global shortage.
Taiwan Semiconductor (TSMC) and Samsung Electronics are the only two companies globally that can manufacture leading edge chips for tech companies around the world. Both are top ten holdings in the APL portfolio.
We think the current supply and demand equation plays nicely into the hands of these key portfolio holdings.
A stock we’re buying
Volkswagen Group
VW has just become a top 3 holding for Antipodes.
We expect it will benefit from a cyclical rebound in economic activity as economies continue to recover from COVID. It is also aggressively pursuing the EV market and we find the extreme multiple dispersion – the difference in price investors are prepared to pay – between VW and Tesla unwarranted.