This was a rather active quarter with a number of transactions, while we also increased our portfolio value. The most important transaction in the quarter was the disposal of Reckitt from our portfolio (Article —> Why are we selling Reckitt Benckiser?). The key concern we had was trusting the management and we believe that if you can’t trust those who run the business, it’s best to stay out.
Before we delve into our Q2 2024 Portfolio Update, here's a list of the long-form articles we published during the quarter, just in case any slipped under your radar.
It’s worth mentioning that in Q2 2024, we also introduced Industry Overviews, which we plan to keep available for free subscribers, at least for the foreseeable future. The purpose of this additional article format is to narrow down potential investment candidates for our portfolio while also generating ideas for you.
Without further ado, let's discuss the economic outlook for the rest of 2024 and review our performance in Q2 2024.
1. What’s moving the market
As we mentioned in prior releases, we approach economic indicators with caution, as our focus remains on the fundamental strengths of the companies we hold. Nonetheless, we can't ignore broader economic trends.
In Q2 2024, several key developments occurred: the Swiss National Bank cut its rates for the second time this year, the Bank of Canada cut rates for the first time in four years, and the ECB also reduced rates for the first time in five years. Sweden followed suit, while the UK and US are taking a more conservative approach but are expected to cut rates in 2024. These actions indicate optimism that inflation is subsiding globally, providing some relief to firms strained by high rates.
The US economy has shown resilience, and the average US consumer seems to be doing well, highlighted by record-breaking Amazon Prime Day sales of $14.2 billion, up 11% year-over-year and US E-commerce retail sales which also increased by 8.6% year-on-year in Q1 2024 and 2.1% from Q4 2023. However, the housing market has felt the impact of higher rates, with existing home sales reaching a low of 3.89 million units in June 2024, a 5.4% decrease from the previous year.
Source: National Association of Realtors
Meanwhile, the commercial real estate market presents challenges that warrant close monitoring. Although the delinquency rate on commercial real estate loans remains at 1.18% as of Q1 2024, the value of delinquent loans has risen from $11.2 billion in 2022 to $24.3 billion in 2023, with recent estimates around $38 billion. With about $1 trillion in loans maturing in 2024 out of a total $4.7 trillion held by investors and lenders, it's crucial to carefully consider investments in REITs or banks. Here are some useful links for those looking into banks: 20 U.S. banks with the largest CRE loan volume, U.S. Banks With the Most Commercial Real Estate Exposure.
Despite mixed signals, the IMF projects global real GDP growth of 3.2% in 2024 and 3.3% in 2025, with Emerging and Developing Asia, including India and China, showing the most promising growth rates.
Source: International Monetary Fund
Overall, we see the economy moving in the right direction but remain cautious about the potential ripple effects of a spike in commercial real estate defaults if this risk materializes.
2. Performance
As of June 30, 2024, our total return for Q2 2024 was 0.7%, with a year-to-date (“YTD”) return of 8.8%. This is below the S&P 500's quarterly and YTD total returns of 4.3% and 15.3%, respectively. Since inception (January 28, 2022), our cumulative return stands at 34.5% (annualized: 13.0%), compared to the S&P 500's return of 28.1% (annualized: 10.8%).
Source: S&P Dow Jones Indices, Broker, StockOpine analysis
A key factor contributing to our underperformance against the S&P 500 in 2024 is Nvidia, which we don't hold and which was responsible for about 35% of the total market returns. However, we are okay with this, as we believe our current portfolio is set for long term success.
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