“The first cut is the deepest,” or so the song goes. But we are not talking about Fed rate cuts, we are talking about Q3 2024 performance. While we humbly know that we do not get everything right, we were made acutely aware of this fact over the last 90 days. Relative performance across our portfolios was disappointing, with all portfolios lagging their respective benchmarks.

Short-Term Pain, Long-Term Gain

We are not making excuses for performance, but we do find it helpful to frame recent performance over the longer term. If we zoom out, all our core strategies were not only positive in absolute terms but have also outperformed their benchmarks over the 1-, 3-, 5-, and 10-year periods and since inception. So, that is the good news. However, as the Einstein quote above notes, we are also here to discuss “today’s events” and how we are thinking about them.

Naturally, the biggest news–as it relates to global equity markets this quarter–came out of both China and the Eccles building. Given that we are not terribly interested in Fed speak, we will instead focus on the former given our positioning and the market impact so far.

Portfolio Setbacks Beyond China

Before we discuss China, Q3 was also characterized by several of our largest positive contributors over the last year underperforming, including GLP-1-related names, primary AI beneficiaries, and a variety of names within India. In our view, very little has changed for the outlook of those companies, and at some point, even the biggest “winners” give back some of their performance gains.

Because our views have not substantially changed, and we have discussed these larger “themes” in nearly every quarterly letter for the past year, we will keep our comments brief: Novo and Lilly are yet to become obese; Meta continues to benefit from AI innovations to improve engagement and effectiveness of advertisements; and all roads in India continue to lead to capital-heavy names given its massive infrastructure buildout and growing energy needs.  

Having said that, it is not as if we have not made any portfolio adjustments over the last few months. In fact, we have continued to find opportunities globally in sectors such as consumer staples and utilities at the expense of names across the technology complex. As we always remind folks, as the data changes, we change. We are seeing a lot of shifting data across those areas, with one of the major ones being relative valuations.

Relatively Attractive

When looking at price-to-sales ratios relative to the MSCI USA Equal Weighted Index for consumer staples, utilities, and the PHLX Semiconductor (SOX) Indexes, as shown in the chart, notice that both staples and utilities are currently near their 10-year median valuations while the SOX remains more than 30% above its own. While we are comfortable with owning higher multiple names, we do feel that they deserve greater vigilance and size adjustments. Valuations are like hiking a mountain: the higher the altitude, the less oxygen we have, and the more cautious we need to be.

Because of this, weaker data points led us to trim tech more aggressively as any sign of a slowdown must lead to faster reaction times, in our view. Therefore, we quite like the potential for select “steady eddy”-type names, given the relative valuations combined with–what we believe to be–meaningful pull-forward across the technology space.

While the quarter was not all China, it was mostly China, both from a performance and headline perspective. Next, we will share our thoughts on the space and underscore why we do not believe this rally in China is likely to last.

For us, the preference has been for “old economy” companies, such as state-owned enterprises in areas like banking, oil and gas, over “new economy” ones that have been in the regulatory cross hairs. And, if the economy were to meaningfully strengthen, we think cyclicals would outperform. But we shall see.  

In closing, we fully recognize underperformance is painful, but we remain confident with our current positioning and our overall longer-term performance. We also recognize that several prominent investors disagree with our views on China, and that is fine as well. To use an overused phrase, “That’s what makes a market.” 

As always, thank you for your support.

Rajiv Jain
Chairman & Chief Investment Officer
GQG Partners LLC 

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INFORMATION ON BENCHMARKS

The MSCI USA Equal Weighted Index holds an equal dollar value across all the stocks within the MSCI USA Index. The MSCI USA Index measures the performance of large- and mid-cap segments of the US equity market.

The MSCI USA Utilities Index is designed to capture the large- and mid-cap segments of the US equity universe. All securities in the index are classified as being within the Utilities sector as per the Global Industry Classification Standard.

The MSCI USA Consumer Staples Index is designed to capture the large- and mid-cap segments of the US equity universe. All securities in the index are classified as being within the Consumer Staples sector as per the Global Industry Classification Standard.

The PHLX Semiconductor Sector Index (SOX) is a modified market capitalization-weighted index composed of companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.

The NIFTY 50 Index is an Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.

The CSI 300 Index (SHSZ300) is a capitalization-weighted stock market index designed to replicate the performance of the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 597 constituents, the index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.

You cannot invest directly in indices, which do not take into account trading commissions and costs.

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© 2024 GQG Partners LLC. All rights reserved. Data presented as at 30 September 2024 and denominated in US dollars (US$) unless otherwise indicated.

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