hugomanenti95 @hugomanenti95: "Hi everyone! In my June update,..."

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Hi everyone! In my June update, I wrote “𝑝𝑜𝑠𝑖𝑡𝑖𝑜𝑛𝑖𝑛𝑔 ℎ𝑎𝑠 𝑔𝑜𝑛𝑒 𝑤𝑎𝑦 𝑏𝑒𝑦𝑜𝑛𝑑 𝑓𝑢𝑛𝑑𝑎𝑚𝑒𝑛𝑡𝑎𝑙 𝑑𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡𝑠, 𝑎𝑛𝑑 𝐼 𝑒𝑥𝑝𝑒𝑐𝑡 𝑐𝑦𝑐𝑙𝑖𝑐𝑎𝑙 𝑠𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑜𝑢𝑛𝑐𝑒 𝑏𝑎𝑐𝑘, 𝑠𝑢𝑝𝑝𝑜𝑟𝑡𝑒𝑑 𝑏𝑦 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠, 𝑓𝑎𝑙𝑙𝑖𝑛𝑔 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 / 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒𝑠, 𝑎𝑛𝑑 𝑎 𝑙𝑖𝑘𝑒𝑙𝑦 𝑝𝑜𝑠𝑖𝑡𝑖𝑣𝑒 𝑖𝑛𝑐𝑙𝑖𝑛𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟𝑠 𝑡𝑜𝑤𝑎𝑟𝑑𝑠 𝑇𝑟𝑢𝑚𝑝.” That was bang on the money! Thanks to our decision to do nothing, we are enjoying a very strong July. Has anything fundamentally changed? Not in my opinion, except investor psychology and positioning. Let’s dive into it! 𝟭. 𝗠𝗮𝗰𝗿𝗼 𝗜𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻 As I expected, inflation has continued to drop, as evidenced by the soft core CPI (0.1%) and PCE (0.2%) prints for June. All told, we are already back to target, after accounting for lagging categories. The key question becomes, can we stay there? Looking at risk manageable timeframes, I’d answer yes. The labour market is cooling. natural resource prices are down, import prices are soft due to deflation in China. Fiscal deficits are shrinking. Monetary policy is restrictive. Where would inflation come from then? 𝗚𝗿𝗼𝘄𝘁𝗵 After coming in at 1.4% in Q1’24, GDP growth was estimated at 2.8% in Q2. After correcting for one-off effects, we get a cruise speed of just above 2% so far this year – at trend. While consumption and non-residential investment are above trend, residential investment continues to be a drag, affected by high interest rates. A few rate cuts could help finally lift the sector. 𝙏𝙝𝙚 𝙥𝙞𝙘𝙩𝙪𝙧𝙚 𝙞𝙨 𝙩𝙝𝙚𝙧𝙚𝙛𝙤𝙧𝙚 𝙪𝙣𝙘𝙝𝙖𝙣𝙜𝙚𝙙 – 𝙨𝙡𝙤𝙬𝙞𝙣𝙜 𝙗𝙪𝙩 𝙧𝙚𝙨𝙞𝙡𝙞𝙚𝙣𝙩 𝙜𝙧𝙤𝙬𝙩𝙝, 𝙛𝙖𝙡𝙡𝙞𝙣𝙜 𝙞𝙣𝙛𝙡𝙖𝙩𝙞𝙤𝙣. 𝟮. 𝙀𝙖𝙧𝙣𝙞𝙣𝙜𝙨 The earnings season is off to a strong start on our side. $HRI (Herc Holdings), while reporting solid results, confirmed a slowdown in small non-residential construction (affected by interest rates), while megaprojects (infrastructure, semiconductor plants, etc.) are well on track. Despite softness in some of its markets, the company was able to maintain the guide thanks to self-help actions (M&A, cost control). HRI has a multi-year growth runway thanks to resilient markets, and market share gains. In addition, there is much room to improve margins. I like the stock as a core holding. $TMHC (Taylor Morrison Home Corp) was also better than feared. Despite a sharp rise in interest rates in Q2’24, the company managed to exceed expectations and raise guidance for 2024. Homebuilders are suffering from high interest rates and affordability issues. However, large ones like TMHC are managing the slowdown very well. They are able to offer incentives such as mortgage rate buydowns that make their offer attractive vs small homebuilders' and second-hand homes. They are winning both on price and product quality. Again, I expect to see TMHC continue to grow for many years, with an extra kicker if rates fall further, $ALLY (Ally Financial Inc) is doing as expected. Falling rates means that their interest expense (mostly variable) is going down while their interest income (mostly fixed) is stable. Back to margin expansion after 2 years of compression! In addition, the tightening of lending standards initiated a year ago is bearing fruit in the form of lower loan losses. While we saw the setup 18 months ago, this took a long time to be recognised by investors. Now that it is, time to consider exiting? 𝟯. 𝗣𝗲𝗿𝗳𝗼𝗿𝗺𝗮𝗻𝗰𝗲 𝗮𝗻𝗱 𝗡𝗲𝘅𝘁 𝗦𝘁𝗲𝗽𝘀 At the time of writing, our portfolio is up 5% on the month, while the $SPX500 is flat and the $NSDQ100 down 4%. After outperforming in the second half of 2022 and first half of 2023, we are facing less favourable conditions and just matching the main indexes on a year to date and 12 month basis (slightly behind large caps but ahead of small caps). Not an easy market but we’ve been generating consistent returns. Let’s see if we finally get the long-awaited boost from easier monetary policy, which should be favourable to us. In terms of portfolio construction, we remain very much tilted towards small caps and value stocks. Despite the recent rally, the valuation gap vs large caps is still at historical extremes. As for general risk management, I am concerned with overextended positioning and unrealistic valuations, which could provide fuel to any small fire. While we are carefully avoiding overcrowded trades, we will not be 100% immune from any risk-off period. Despite those concerns, the macroeconomic landscape is supportive, with inflation surprising to the downside and growth to the upside. Pockets of weakness are appearing (lower end consumer, housing), but Fed cuts could provide a well-needed boost to rate sensitive sectors, after two years of correction. 𝗧𝗵𝗲𝗿𝗲𝗳𝗼𝗿𝗲, 𝗼𝘂𝗿 𝗻𝗲𝘅𝘁 𝘀𝘁𝗲𝗽 𝗶𝘀 𝘁𝗼 𝗸𝗲𝗲𝗽 𝗮𝘁 𝗶𝘁, 𝗮𝗻𝗱 𝗮𝗱𝗮𝗽𝘁 𝗶𝗳 𝗰𝗼𝗻𝗱𝗶𝘁𝗶𝗼𝗻𝘀 𝗰𝗵𝗮𝗻𝗴𝗲! All the best, Hugo

5 Mentioned

HRI

Herc Holdings

TMHC

Taylor Morrison Home Corp

ALLY

Ally Financial Inc

SPX500

NSDQ100