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Monthly Report International Fund November 2022


International Fund November Monthly Report

Global equities performed strongly in November, with major indices rising between 5% and 15%. The Australian dollar also appreciated strongly, particularly against the US dollar, mitigating most of the gains for Australian investors. The Index rose 2.7% in Australian dollars and the unit price for the Forager International Shares Fund fell a touch.

The main market gains were made following relatively benign US inflation estimates and growing evidence for a significant fall in inflation throughout 2023. The Manheim index of used car prices—the single most significant contributor to US inflation over the past year—has now fallen 16% from its peak in January. Petrol prices are down 25% since June, shipping costs have more than halved and lumber prices—after quadrupling through 2021—are now back to historical levels. Moreover, global food price growth looks like it is about to turn negative, a stark difference from the 20-40% year on year rises witnessed through 2021 and the first half of 2022.

When the 2022 highs for these items are used as the base for inflation calculations in 2023, they will be meaningful negative contributors and headline inflation numbers will fall dramatically (and possibly be negative). That could be a temporary reprieve—job markets remain extremely tight— but longer-term interest rates have fallen meaningfully as investors get confident that there aren’t too many rate rises to come.

Whether they are right or not, the economic effect of the current level of interest rates is yet to be felt by most of the economy. While some of the more obviously resilient companies’ share prices are now back near all time highs, share prices for many still reflect extreme pessimism about future profitability.

Across the International Fund, we own stocks in both camps.

Autodesk (NASDAQ:ADSK), Keysight (NYSE:KEYS), Sony (TSE:6758) and Flutter (LSE:FLTR) are all in the resilient camp and their most recent results announcements justified that view.

Autodesk saw strong demand in the third quarter with the company reporting record revenues. Sales grew 17-18% year on year in North America and the Asia Pacific region and the company commented that end market demand remained strong and renewal rates were solid – more than offsetting macroeconomic headwinds.

Keysight, an electronics testing and measurement business, posted another strong quarter, with orders growing almost 10% year on year, earnings beating expectations and a record order backlog.

Although one may have expected Sony to experience some weakness in the quarter given its exposure to consumer end markets (video games, music, movies and semiconductors for smartphone cameras) it reported a strong set of results across numerous divisions. The company also raised full year guidance by approximately 5%.

Online gambling giant Flutter started the month winning in its arbitration with FOX, followed by a trading update showing continued growth, especially in the US. Management also held a capital markets event in New York focused heavily on FanDuel. Management outlined a path for FanDuel to ncrease revenue up to 5-fold between 2022 and 2030, with a margin potential of 25-30%, all of which is consistent with our investment thesis.

While share prices of those companies have appreciated, investors still have little patience for companies navigating a more difficult environment. Cryoport’s (NASDAQ:CRYX) share price fell 28.6% in November thanks to a slump in demand for its cryogenic freezers due to some customer concerns about the macroeconomic environment. There is little reason to extrapolate one quarter’s results but investors aren’t waiting around to see. And UK dealer group Motorpoint’s (LSE:MOTR) share price has halved over the past year thanks to supply chain problems that will dissipate at some point.

New car supply globally was slashed in recent years because of manufacturing interruptions and input shortages. Today that means a shortage of the sort of near-new cars that Motorpoint specialises in selling. Revenue grew 30% versus the same half last year, but more than all of that came from a massive increase in used car prices. The volume of cars sold actually fell 8%, almost wiping out its profit for the period. Motorpoint is winning share and is well placed to earn record profits when markets normalise. Shareholders need to be patient though, and it might get nastier first.

The recovery in global markets over the past six months has taken the Index back to within 10% of its all time high in January. Trading at approximately 17 times earnings, it is far from screamingly cheap. The discrepancy between those in favour and those not, however, is extremely wide. By the end of 2023, we will have a much better idea whether the pessimism about those economically sensitive businesses was warranted.