ChatGPT, the Magnificent Seven, Ozempic, and Higher-for-longer

Every year has catch phrases that embed themselves in the market lexicon and feed into the narrative of the day. This year has been no exception.

OpenAI released ChatGPT in November last year and ignited the imagination of investors of the future applications of Artificial Intelligence and drove enthusiasm for the ‘Magnificent Seven[1]’. Rallying 99%[2] year-to-date, this group of technology stocks have generated a large proportion of the US (and consequently global) equity market gains for the year. When technology is stripped out of the S&P 500 index, the return drops from a heady +21% to only 3%[3]  – a demonstration of how much heavy lifting just one sector has done.

The Mint Diversified Growth Fund holds a significant allocation to international stocks, and we have benefitted from the rally in a number of these technology-oriented names. Within our portfolio, we own Microsoft, Apple and Amazon and have seen strong gains from these holdings. Our quantitative screening process coupled with our more qualitative evaluation leads us to names with consistent earnings growth and these technology names fit that definition well.

While not a large cap technology name, we have also held a position in another market favourite. Novo Nordisk has rallied this year on the back of its main product Semaglutide, which is used to treat diabetes under the brand name Ozempic – another major buzz word for 2023, particularly within celebrity Instagram posts! 

GLP1’s[4] like Ozempic, have been shown to assist in weight-loss and have exploded as the new obesity tackling wonder-drugs following a number of successful trials. While we have benefitted in our Growth Fund from the position in Novo Nordisk, the extrapolation of the benefits of these drugs has caused a significant sell-off in other healthcare companies. CSL, a core holding in our Australasian Equity Fund has been on the receiving end of this.

CSL is an Australian biotechnology company with a variety of product lines, including kidney dialysis. The market has written down this kidney dialysis business on the expectation that a quick-fix obesity cure will make a large part of the solutions they provide redundant. We believe that much of this extrapolation is overdone. A similar phenomenon occurred when Statins were first introduced and led investors to write-off healthcare companies with cardiovascular-related products. While Statins are an essential product in the treatment of cardiovascular diseases, it did not mean they were an immediate or full solution. CSL fell 25% from its peak in June (a combination of general market malaise and concerns about its dialysis business) and we took advantage of this price decline to add to our position.

The resilience of the US economy has surprised many and robust data pushed the narrative with respect to rates that they would be ‘higher for longer’. It is intriguing that US CPI was 9.1% in mid-2022 and had fallen to 3% by mid-2023 and yet the US 10-year Treasury yield briefly breached 5% in October – significantly higher than it was in 2022. New Zealand Government Bonds track the US government bond moves pretty closely within the longer-dated components of the market and so even though the domestic growth picture has been less rosy than the US, this has not translated into moves across the yield curve. Within the fixed income component of our Diversified Funds, we have maintained a long duration[5] position in anticipation of a decline in the rate of inflation. That decline has transpired, but with yields moving higher, we have not generated price gains on our bonds, merely harvested the yield on our portfolio.  We continue to hold this position and expect that economic data will soften and prompt a reassessment of the ‘higher for longer’ view. This positioning appears to finally be coming to fruition - recently yields have been backtracking from their recent highs on lower inflation and weakening economic data out of the US.  

Unfortunately, for domestic New Zealand investors, our equity index has not rallied in line with US markets. To mid-November, the NZX50 Index was down 2% year-to-date – symptomatic of our more defensive characteristics and lack of high growth technology names.

Despite this lacklustre domestic market environment, we have had some strong performances from a number of our core holdings. Infratil has been a long-term high conviction holding for us and is our largest active position in the Mint NZ SRI Equity Fund. Last year Infratil acquired a stake in Longroad Energy, a US renewable energy company which develops and manages wind and solar projects. Mint was recently in the US to visit the solar sites and we retain our belief in the long term growth of the underlying assets and Infratil management’s ability to identify opportunities and execute on them.

Additional strong performances have come from our technology names in the form of Serko, Pushpay, and NextDC (in our Australasian funds).  Serko is a travel management company whose joint venture partnership with an online travel provider has unlocked significant revenue potential and market share growth. Pushpay, which provides software to mission-based organisations, received a buyout offer earlier this year, allowing us to fully realise the position at a profit. NextDC is an Australian data centre operator and has been a bright spot in our Australasian Property Fund in what has remained a challenging environment for the sector.

We have also been pleased to have remained underweight several names which have endured a difficult year. We have been wary of the long-term prospects for a2 Milk given the demographic profile of their core market (China) and the increasing levels of marketing spend required to maintain market share. We have also been wary of Fletcher Building’s habit of provisioning every year and have historically felt that the price did not reflect the potential for these frequent adjustments to earnings (as well as a more challenged real estate environment given elevated interest rates). With looming additional costs relating to faulty pipes in Australia, we are pleased to have had limited exposure to this name.

Next month, we will share our views on 2024 and our market positioning. We doubt we will be able to guess the key catchphrases for 2024, but no matter. Our focus remains identifying quality companies with strong or improving ESG credentials and consistent earnings. Irrespective of what markets may bring, we see this as the best mechanism for our clients to generate long term capital growth.  

[1] Microsoft, Nvidia, Meta, Alphabet (Google), Apple, Amazon, Tesla
[2] As at 30 Nov 2023 (BM7T Index)
[3] S&P500 Total Return Index (SPX Index) and S&P 500 ex Technology Total Return Index to 30 Nov 2023
[4] Glucagon-like Peptide 1
[5] ‘Long duration’ means we have carried more sensitivity to moves in interest rates than the benchmark. This positioning was implemented on the expectation that interest rates would fall and as bond prices move inversely to rates/yields, resulting in price gains.