2023 turned out to be a mirror image of 2022. Our principal strategies that had done well in 2022 struggled in 2023 and vice versa. However, if composite performance is examined on a consolidated basis over the last two calendar years, all of our strategies delivered strong cumulative net returns—Global up over 14 per cent, International up more than 8 per cent, US up more than 14 per cent, and Emerging Markets up over 3 per cent, as seen in the table at the bottom. The relative underperformance in the Global and US strategies was driven by our decision to maintain overweights to the energy and healthcare sectors, and an underweight to information technology, as we exited 2022 and entered 2023. While technology names exhibited a strong rally as soon as the calendar turned, energy lagged due to the slower than expected recovery in China while certain healthcare names were held back by concerns of rising medical costs due to a normalization of elective surgeries post-COVID and the expected popularity and expense of anti-obesity drugs.  

The turnarounds in our strategies were driven by broad market changes. We believe 2022 was about the world discovering that fossil fuels are still much needed, zero interest rates are not sustainable, GAAP profits actually do matter, and the excess tech demand driven by the COVID environment could not last forever. 2023, however, was much more about the tech sector emerging out of the COVID hangover, aided by generative AI technologies becoming more tangible, further compounded at the end of the year by the increasing possibilities of central bank rate cuts.

Having said that, while we’re never satisfied with underperformance across any time period, we’re, of course, aware that this business is won and lost through time, and we remain quite proud that longer-term outperformance is firmly intact.

Now, in keeping one eye on reflection and one eye on the future, we’ll discuss a couple of crucial investment outcomes that occurred during the past year and highlight one new one that may unfold as we progress through 2024 and beyond.

India Ignites

We often talk about changing our views when the data changes, and it’s hard to come up with an example that encapsulates this more so than our investment across a variety of Adani Group companies held in our Emerging Markets, International, Global, Global Dividend Income, and International Dividend Income strategies in 2023. We also think that making those investments was very much reflective of our quote above, where consistency in the face of change is more stubborn than virtuous. In our opinion, large dislocations create large opportunities. We saw this in 2022 when contrasting opportunities in technology versus energy globally, and in 2023, we saw this post the large drawdown across the Adani complex in early 2023.

We previously passed on investing in some of the Adani companies in prior years, not because of anything we deemed nefarious but because we thought the valuations were too rich for the growth opportunities or the prospects of the broader opportunity set at that time. It’s hard to stress that enough because things often do not change in a vacuum. However, there was a massive decline in price earlier in the year. Given our familiarity with the businesses, we were able to act quickly. Our traditional and non-traditional analysts conducted thorough work, leading us to the decision. We realized that our understanding of the businesses was at odds with the headlines. We recognized that the decline in price represented an opportunity.

But in the case of Adani, the more we assessed the data and the more research we did, it became rather obvious to us that if we tuned out all the noise, these appeared to be impressive assets to invest in—run by what we think is one of the most dynamic and competent management teams anywhere in the world! Thus, we sized our Adani exposure in a thoughtful manner in the strategies that held it to help ensure the positions could make a meaningful difference to our returns for the disconnect we found. It may be worth noting that many of the accusations and issues in question appeared to be more politically motivated rather than focused on the fundamental drivers of the businesses’ future earnings and in our view  this was the case, relative to the market price. It is important to highlight that various governments around the world partnered with Adani on key projects, including the US government, which recently invested more than $500 million in Adani’s Sri Lanka port after examining and dismissing the claims, as noted in the below headlines. In our view, the disconnect between the narrative and reality, based on fundamental analysis often creates rather attractive investment opportunities for us—energy and Adani are two big examples. We promise to keep looking.

On a smaller scale, this was somewhat reminiscent of Q4 of 2022 when many investors looking at Brazil were worried about the so-called horrors of the newly elected Lula regime and what policies might negatively impact equity markets, as shown in the below headlines. Fortunately for us, we thought those fears were far too overblown and that worked out okay as well. We held a large position in a state—owned oil company in an emerging market when many investors were spooked by the headlines, also shown below. Again, in a politically tense environment where emotions often speak louder than logic, we stuck to our process and the facts.  

Contrast With Chinese Characteristics – Charts That Look Like the Matterhorn

However, contrast what we just highlighted with the likes of China, where, in our view, you need to be an expert mountain climber if you’re looking at the Matterhorn or an expert skier if you’re deciding on what diamond runs to tackle. From our perspective, many of the prior investment darlings in China resemble a giant incline of hope, as evidenced by the mountain-like characteristics in the photo below.

So, what gives? What’s driving the optimism? In our view, it’s a couple of things, and again, these are in stark contrast to a country like Indonesia or India, where we remain overweight, or even Brazil, where we’re also overweight. If we look at the below Chinese stock chart, as a small example, we continue to witness an unpredictable regulatory environment, this time across gaming, where in roughly three days, policy went from uber negative to somewhat less negative. But this isn’t new, as the non-stop recycled headlines of potential stimulus have given investors whiplash basically since the peak of the Matterhorn. This is also one of the primary drivers of our relatively persistent underweight China since the second half of 2021, where the regulatory whiplash, as shown in the example headlines, has clouded the earnings trajectory of a whole host of “new economy” names and has driven us into more “old economy” names for what little exposure we maintain. In the US, the mantra of “don’t fight the Fed” reigns somewhat supreme, while in China, it’s “don’t fight the CCP.” This hasn’t stopped investors from increasing their excitement for Chinese ETFs, which have grown at the “fastest pace on record,” according to a recent Reuters article.²

Changing environments

It is human nature to rely on your past experiences and the knowledge you have acquired over the years to make decisions. While often useful, this can become a trap in investing, which is why constant reassessment of the landscape and adaptability to changing environments is key. In fact, this willingness to change our minds and adapt to new waters is one of the hallmarks of our process and philosophy. While certain managers face headwinds during inflection points, we tend to thrive on change. Hence, our history shows that we often do better in a more dynamic environment than during stable periods. This is a daily exercise. It takes humility to say that what you thought you knew and what worked for a long time no longer applies.

Developed markets technology is an area where we are more upbeat now, especially in semiconductors—the industry is still under-earning, and the frothiness of valuations is no longer there, in our opinion. Water fab equipment is still running at $85 billion, and memory companies are just turning profitable again. We believe this, combined with long-term structural growth drivers for semiconductors, makes this an attractive space. And this is in contrast with our pessimism in the second half of 2021 when we were very nervous about valuations in technology. The fascinating aspect is that most managers are still underweight technology, as detailed in the chart below. Talk about dogmatism!

Policy Whiplash Continues

Another area where our mindset has changed in 2023—for the time being—is alcohol. As we’ve discussed with the continued concerns around China, particularly from a growth perspective, whether at the top of the house or a variety of the underlying companies, is there an area that is likely to see a meaningful deceleration in earnings growth in the years ahead? In our minds, we think there is, and that area is alcohol.

Interestingly enough, the potential setbacks for alcohol, in general, are not unique to China as a whole host of companies in 2023, from LVMH to Rémy and, of course, AB InBev, discussed the challenges of the US market. We’re sure many of our readers know of the struggles of AB InBev throughout the calendar year, and while revenue declines for AB InBev certainly weighed on the category in general, we think there is something larger here at play (and no, in this case, it’s not the impact of GLP-1s). For beer specifically, it’s about changing preferences, with a recent article in The Wall Street Journal denoting a more than 5 per cent drop in annual shipments through the first nine months of 2023, by far the worst since the Global Financial Crisis. With two booms and busts in the last 10+ years (first craft beer, then hard seltzers), it’s been a difficult landscape for companies to navigate. Don’t take our word for it, as the President of the National Beer Wholesalers Association put it back in October: “this is an industry-wide, five-alarm fire.” ³

But again, this isn’t unique to beer, with Rémy Cointreau noting in its most recent earnings call from Q3 2023, that overall revenues plunged more than 20 per cent, with US sales falling nearly 50 per cent year over year! Talk about the diamond runs. Citing a range of unfavorable factors, combined with competition from other spirits such as tequila, which was cited as being an issue for beer as well, and you’ve got the mix of a highly unfavorable (snow) storm.⁴

Lastly, and this is another reason for our current pessimism on the space, could these entire industries go ex-growth given challenges to the premiumization thesis that has been a major growth driver for many years? We’re seeing a lot of fragmentation across the landscape from increased introduction of brands across verticals, and with increasing economic stress now even weighing on some more luxury names, will the trade-down trend reverse many years of high-end growth? We shall see if this continues, but again, from Rémy’s latest earnings call, the liqueurs and spirits division faced even more challenges than cognac, particularly at the high end, where they blamed the misfortunes of real estate millionaires that had typically underpinned that segment. So, time will tell.

Like all things, this view is certainly subject to change, for the one thing we can be sure of is that things constantly evolve, and our aim is to navigate those changes successfully, not stubbornly.

As always, thank you for your continued support.

Rajiv Jain
Chairman & Chief Investment Officer
GQG Partners LLC

WP DataTables

GQG Partners LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this performance information in compliance with the GIPS standards. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. GIPS composite reports may be obtained by emailing clientservices@gqgpartners.com.​

Performance data is based on the firm’s composites for each strategy. The composites were created in June 2016. Performance presented prior to June 1, 2016 was achieved prior to the creation of the firm. The prior track record has been reviewed by Ashland Partners & Company, LLP and conforms to the portability requirements of the GIPS standards. On June 28, 2017, ACA Performance Services, LLC acquired the investment performance service business of Ashland Partners & Company, LLP. For periods after June 1, 2016, the composites consist of accounts managed by GQG pursuant to the strategy.​

The US dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. Net performance is calculated after the deduction of actual trading expenses and other administrative fees (custody, legal, administration, audit and organization fees). Net returns are calculated using the highest/model rack rate fee. Net performance is net of foreign withholding taxes. PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RESULTS. Please see the Appendix for additional disclosures regarding the composites. Returns for periods greater than one year are annualized.

* The US Equity composite inception performance data is since July 1, 2014. The GQG Partners Global Equity inception performance data is since October 1, 2014. The GQG Partners International Equity and Emerging Markets Equity inception performance data is since December 1, 2014.

DEFINITIONS

Wafer Fab Equipment (WFE) Market: Market comprising the manufacturers of the machines which in turn manufacture semiconductors.

END NOTES

¹Mises, Ludwig von. Human Action, Scholar’s Edition. 2008.

²China sees an ETF boom as investors wait for stocks to trough

³The Bud Light Boycott Was Just the Beginning of a Crazy Year for Beer

⁴Half Year 2024 Remy Cointreau SA Earnings Call, November 30, 2023