Portfolio Update: Top 5 Positions Going into 2024
• Focus on cash flows in anticipation of a low growth economy • Concentrating more towards highest conviction positions • Underweight US stocks • Overweight Emerging Markets and China
Disclaimer: This writeup is not investment advice. I am sharing my research insights and positioning on individual companies for informational and entertainment purposes. In particular, I do not take into account any readers personal financial situation. Please do your own research.
In the last weeks I have been going through a significant portfolio refresh. After a stellar 2023, I feel a strong urge to maintain an outstanding return potential in my holdings. Naturally, I am becoming more cautious towards stocks that have worked extremely well. By the laws of return calculation, they have lost some of their future return potential through a higher entry price in the equation.
In this article I am sharing the rationale behind the “big picture” of my positioning. I will also briefly discuss my five largest positions and their current valuation indicators. More detailed writeups on specific positions will follow in the next weeks, beginning with my largest position IWG.
Cautious View on the US Economy
I remain convinced that the fight against inflation is long won. Only the misleading shelter data is still pushing official CPI inflation above the 2% target. Using current data from the rental market, shelter inflation is between 0-1%, which results in adjusted CPI inflation significantly below the 2% target. As a result, I view the current monetary policy overly restrictive. Short term rates are above 5% and the 10y is above 4%, transferring into inflation adjusted interest rates of about 3-4%. I view these real interest rates as way too high for the US economy, where GDP growth is only held up by unsustainable government spending. Unsustainable, because the government spending is financed by an excessive deficit. The deficit will either have to be reduced in the future or offset by higher taxes. Both measures would revert the current stimulation of the economy.
I am normally not overly focused on the macro environment, but the current situation appears extremely stretched to me. As a consequence, I believe that excessive interest rates will continue to weigh more and more on the US and the global economies. At this point, I do not see a scenario where the Fed cuts fast enough to revert the damage. If not a recession, I am at least expecting a low growth environment. IMO chances are high that US companies will increasingly struggle and we will likely see a disappointing earnings season.
In sum, this is not an environment in which growth companies can blossom. I have thus strongly reduced my exposure to unprofitable growth companies. Moreover, I have significantly reduced my overall exposure to the US stock market. Current valuations of US stocks are adding to my caution about US stock market. At least the technology sector, in particular the “Magic 7” appear very richly valued. Since I run a global investment portfolio, the best benchmark is the MSCI World, which currently has a 70%(!) exposure towards US stocks. My current US exposure is only 15%, further offset by a 2% position in puts on the Nasdaq and Apple.
The European Economy is Struggling, too, But Stocks are Much Cheaper
Where to invest if not in the beloved US stock market? I am not much more positive on the European economy, which faces similarly troublesome interest rates. However, many European stocks appear relatively cheap in comparison to the US. This means investors in European stocks are at least compensated with cheap valuations for the challenging macro environment. I have currently 47.5% of my portfolio in European-based companies.
The Opportunity in South East Asia and China
The biggest shift in my portfolio is a strongly increasing exposure towards South East Asia and China. My updated portfolio has a 32.5% weight in South East Asian and Chinese companies. The MSCI Emerging Markets ETF is trading at about the same level as in spring 2006 (!), which hints at the potential to find some nuggets in this market.
What attracts me towards China are dirt-cheap valuations. Yes, the economy is not doing well after Covid-restrictions that were held on for too long, muting consumer spending. However, the “fire power” of Chinese citizens to increase their spending is enormous. Moreover, China’s debt-to-GDP is still modest, which allows for plenty of unused capacity to stimulate the economy. Perhaps this is not the bottom yet for Chinese stocks, but once a bottom is reached, I could imagine a violent comeback of the Chinese stock market. We are currently observing a similar phenomenon with Japanese stocks.
South East Asian stocks (excluding India) also seem rather cheap overall, but with stronger economic growth. GDP growth is solid around 5% in many countries and the demographic distributions are among the most favorable in the world. More importantly, I view South East Asian Economies as relatively independent from the challenges faced by the US and Europe. While they may also suffer a bit from a potential global recession, I would expect economic growth in South East Asia to hold up among the best worldwide. On a 5-10y timeframe, I view it as way more likely than not that the global investment community “rediscovers” Emerging Markets and we might see another super cycle with expanding fundamentals and expanding valuation multiples.
My Top 5 Portfolio Positions going into 2024
IWG (15%)
IWG is the world’s largest provider of flexible workspaces. The company is currently pivoting into a capital light business model, a move that appears so far underappreciated by the market. I will explain in a separate writeup why IWG is my largest position, but I would like to give a brief overview of the current business performance:
In 2023 H1, IWG achieved GBP 198m in EBITDA, up 48% from the prior year.
I anticipate that full year EBITDA will be at least GBP 400m (about USD 500m).
At the end of Q3 2023, the company had GBP 643m net financial debt (excluding the accounting of operating leases under IFRS 16).
With a current market cap of GBP 1780m, IWG trades at an EV/EBITDA multiple of about 6.
IWG plans to report in USD from 2024 and may even adopt US GAAP and perhaps pursue a US listing, which makes sense as the majority of revenues are from the US.
On December 5, IWG set a medium-term ambition of $1bn run-rate EBITDA. This would represent an EV/EBITDA multiple of about 2.2 (!) at the current market capitalization and net debt. Hereby it is important to note that any incremental EBITDA for IWG will be increasingly capital light.
IWG states that “Focusing on growth through the capital-light business means that growth capex requirements will be dramatically lower in the future, generating more free cash flow for shareholders.” Currently, virtually all newly opened centres are capital light, as shown in the following table from IWG’s Q3 trading update:
Alibaba (10%)