The global economy started this year as it ended the last – neither hot enough to force interest rates higher, nor cold enough to adversely affect companies looking to grow their bottom line. With many arguing that conditions are “just right”, the fall in the US stock market last week – and its impact on other global markets – demonstrates that we’re still a long way from a Goldilocks economy.
The fall in the US stock market and subsequent plunge in global stock markets reflects a more uncertain global economic picture than many commentators had expected. While asset prices continue to be supported by strong global growth and positive forward-looking sentiment – all under-pinned by low interest rates – market jitters have arisen on the prospect of higher US inflation, brought about by a strong labour market and higher oil prices.
But none of this alters the fundamentals: the US and Europe continue to gather economic momentum, and the outlook for emerging markets and China is good. All in all, the immediate outlook continues to be encouraging, but how stock market reacts to rather stretched valuations is anyone’s guess.  Given the volatile equity markets a few opportunities have presented us to make changes to our equity positions with the Clime International Fund.
In the Clime International Fund recent changes include:

  1. Microsoft has been trimmed after a spectacular performance over the last few years. The company announced very strong results but the valuation is now more stretched than at any time the last 5 years reflecting strong business fundamentals.
  2. We have bought back into NetEase after selling the stock for a 20% gain in 2017. The company is executing well on new growth initiatives which should pay handsome shareholder returns in the future as the firm uses its strong ecosystem to sell more services to its existing client base.
  3. We have started to build a position in Samsung Electronics. Contrary to other smartphone manufacturers, Samsung has vertical supply benefits given that it makes many of the key components used by clients of the firm. As such the company should not suffer the same potential costs inflation should component prices rise and thus has economies of scale. This should assist in increasing or at least maintaining its operating profit margin for the foreseeable future. The graph bellows show that even though the company has grown earnings at a very healthy rate over the last 3 years the valuation has contracted to very attractive valuation levels whilst maintaining an 16% return on equity. We believe the stock is under valued at current levels.
Source: Bloomberg, SPW analysis

We believe that patience will be rewarded as we enter a period of higher volatility.