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Matt Clark

Market Outlook

ACWI ex-US Outlook

Outlook
12 July 2024

By

Portfolio Manager, TT ACWI ex-US Strategy; Co-Portfolio Manager, TT Global Smid-Cap Strategy

Latest ACWI ex-US economic and market outlook. 

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Our core view remains unchanged; inflation is gradually falling and growth is holding up reasonably well, which makes for a Goldilocks environment. Consequently, we are generally positive on markets as this is typically a supportive backdrop for equities. There are currently four major themes that the portfolio has significant exposure to: AI Data Centres; India; Travel & Leisure; and Biologics. We will now cover these themes in turn. Advances in hardware capability have allowed AI model sizes to grow exponentially, meaning that AI is now exceeding human capabilities in many areas. The race to establish a lead and harness the power of AI is leading to significant increases in spending on data centres and related hardware. We are playing the theme through SK Square (trades at a 65% discount to its holding in SK Hynix, the clear leader in High Bandwidth Memory, a key enabling technology for AI); TSMC (dominant global chip manufacturer of cutting-edge semiconductors, including AI leaders such as Nvidia); Samsung Electronics (trades at a significant discount to SK Hynix, the HBM leader, but Samsung will also directly benefit from the growth in this market and, indirectly, through the tightness it will cause in the DRAM market, where it is the global leader); and Goodman Group (growth to be driven by its worldwide portfolio of data centres with secured power totalling 4GW – power is a key constraint to data centre growth).

We are bullish on India for a number of reasons, including its favourable demographics and our view that it is seeing a simultaneous upturn in the credit, investment and housings cycles. We are playing this through banks (major beneficiaries of the simultaneous upcycles, well capitalised and trading at attractive valuations); and hotels (rising middle class, improving infrastructure and low prices are leading to a boom in demand, while pandemic era delays and cancellations as well as high finance and construction costs and a lengthy approval process are leading to supply constraints.)

We believe that Travel & Leisure will capture an increasing proportion of global GDP due to rising disposable incomes, improving infrastructure, and an increasing preference for consuming experiences over goods. We are playing this through Indian hotel operators, as well as European operators such as Accor, which also has an asset-light business model that generates strong free cash flow and shareholder returns. Other related exposure includes Samsonite (global luggage leader, lean cost structure, market share gainer within a growth market, high FCF generation, and a management team actively looking to unlock value in a discounted share price); and Ryanair (leading discount airline with structurally favourable cost structure that allows it to consistently take share within its markets).

Finally, we see structurally increasing pharmaceutical volumes driven by an ageing population, improving incomes, and advances in science that identify more drug targets and ever more ingenious ways of reaching those targets. Developments in biotechnology such as immunotherapy, gene therapy and mRNA technology are at the forefront of this, and biologics continue to increase as a percentage of worldwide prescription drug sales. The rate of new drug development continues to increase and it is becoming ever more costly and time-consuming to trial these drugs. Consequently, pharmaceutical companies are outsourcing clinical trials to Contract Research Organisations such as Icon Pharmaceutical, which is taking share within the CRO market thanks to its scale and efficiency. Biologics are extremely valuable substances that need to be packaged and delivered accurately and safely. This is leading to increased demand for high value delivery solutions, such as pre-filled and sterilised vials and syringes. Gerresheimer and Schott Pharma are two of just a few players capable of meeting the industry’s needs, and should see accelerated growth and profitability as they provide increasingly high value products. Novo Nordisk is a global leader in diabetes treatments, most notably GLP-1 therapies, which have shown to be highly effective in helping obese patients lose weight, resulting in a multitude of health benefits. Given the obesity epidemic in the West and the US in particular, there is a great societal need for these medicines. Consequently, GLP-1 drugs look set to become the largest class of pharmaceuticals ever seen, with market size estimates of as much as $100bn. We expect Novo to retain a leading position in this market. Croda is a leading global supplier of ingredients, additives and speciality chemicals. Growth looks set to accelerate over the next 5 years due to its position as the supplier of excipients for the majority of new mRNA vaccines that will start hitting the market in 2025 and beyond.

Important Information:
Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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