Global equity markets closed December with strong advances for the second consecutive month. Declining inflation data prompted the Fed to announce it would cut rates in 2024.
Overall, 2023 was a positive year for markets, owing to a scenario in which interest rates were lower at year-end than at the start of the year. German 10Y bond yields fell to around 2% after Eurozone inflation eased from +8.5% in December 2022 to +5.9% (the IMF expects +3.3% for 2024). This, coupled with macro data that indicates a moderate slowdown in the economy in 2024, rather than a sharp recession, had a favourable impact on equities.
Regardless of the market’s widespread gains, we would like to point out that EDM Strategy’s superior performance, relative to the index, is attributable to having, once again, avoided grave stock-picking errors. Roughly 90% of the portfolio closed the year in positive territory, allowing the fund to climb to the top of the 2023 European equity fund rankings (98th percentile of funds in its category, according to Bloomberg).
Though positive contributions were broadly dispersed, it is worth noting that the fund benefits from two major trends of the past year—the emergence of generative AI and the introduction of effective anti-obesity medications (GLP-1)—thanks to our positions in the leading manufacturers of machinery for cutting-edge semi-conductor production (ASM and ASML) and in the pharma company Novo Nordisk. The latter will increase profits by more than 40% in 2023 due to the strong demand for its diabetes (Ozempic) and obesity (Wegovy) products.
In general, the basket of more defensive companies lagged over the course of the year, while cyclical and industrial sectors saw substantially higher increases. Among the latter is CRH. The construction materials company had a very positive 2023 with respect to the upward revision of its profit estimates (+33%) in a year when its pricing power was questionable. The company also successfully completed the transfer of its listing to the NYSE, partially reducing the valuation discount at which it trades vis-à-vis its US comparables. We anticipate the share will continue to be buoyed by a substantial share buyback programme and healthy operating performance, with support from the US infrastructure plan, the investment plan in the tech industrial sector, and the clean energy investment plan. The next driver is its potential inclusion on the US S&P 500.
Another fund company that has appreciated considerably this year is Inditex. The Spanish firm published excellent results on 13 December, with double-digit sales growth and a sizeable improvement in margins. Moreover, the EPS estimate for 2023 (YTD) has been revised upward by nearly 30%.
We remain confident that, over the long term, share prices are driven by profit growth. Our 5-year annualised growth estimate for the whole portfolio is +12% with multiples at reasonable levels, consistent with their historical average. As such, we believe that a vehicle like EDM Strategy offers participants the possibility of obtaining attractive returns with an acceptable degree of risk.
EDM Strategy closed 2023 with gains of +26.01%, outperforming the MSCI Europe NR, which closed at +15.83%, by roughly 10%. Its average annual appreciation since 1 January 2019 (last five years) is 12% (vs. +9.8% for the MSCI Europe NR), and it ranks in the 90th percentile of funds in its category, according to Bloomberg.
Beatriz López and José Francisco Ruiz,
partners and managers of EDM Strategy
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