BMO Global Equity Fund Active ETF Series-BGEQ-Commentary
A Global View Built on Sector Insights
Jun. 24, 2024- Experienced PMs with a team who follows a Sector Process
- Top ideas from each sector combined into one Global Equity Portfolio
- Core Global Equity Fund that incorporates Macro views
Portfolio Changes:
- The portfolio is positioned with overweight Consumer Staples, Financials, Healthcare, and Industrials, plus underweight IT, Communication Services, Consumer Discretionary, Utilities, Real Estate, and Energy.
- During May we increased our target weight in Financials, Health Care, Communications, and Consumer Staples, and decreased our target weight in Real Estate and Consumer Discretionary.
- Stock selection within IT, Industrials, Consumer Staples, Utilities, Consumer Discretionary, Energy, and Financials were positive contributors during May, while selection within Health Care were detractors.
- Our unique Global Equity Sector PM Model allows us to act swiftly when we see macro or micro conditions change.
Global Equity Outlook:
- The winds of change are blowing. In early June, the Bank of Canada (BoC) became the first of the world’s major central banks to lower interest rates, cutting by 25 basis points, a day before the European Central Bank (ECB) made the same move. But in the United States, it is a different story. There, we’ve seen a great run-up in markets on the back of resilient consumers and strong earnings. Given the strength of the U.S. economy, a higher-for-longer interest rate trajectory seems nearly certain.
- The U.S. market continues to be in a relatively unique position. When soft data comes through, it can be market positive because it gives the U.S. Federal Reserve Board (Fed) more room to cut interest rates. Whereas with strong data, which supports revenues and earnings, it is a negative for interest rate policy. For the second half of 2024, we expect this trend to continue, with ongoing volatility. Yet we still remain overweight to U.S. equity because those companies — and the broader economy — are still in the best relative position.
- On equity markets, Nvidia has done its part, delivering on promises and expectations. But when you look under the hood, the breadth of stock participation has been narrowing. Inflation is an issue for many parts of the market. That said, other parts, such as commodity producers, are getting a tailwind. It is not just gold but base metals now reacting, namely copper. Part of this is the long-term theme of AI and an ‘electrified everything.’ But be mindful — when you start seeing commodities pop, there’s a fear that we’re going to keep seeing inflation. We are also starting to see some weakness in the economy, which is when talk usually turns to stagflation. For the moment, cyclicals are still outperforming defensives, with one notable exception: utilities, which are being caught up in the Artificial Intelligence (AI) mania.
- Don’t take your eyes off of the consumer. The key question is: what will happen to inflation? Will it head lower like in Canada or stay relatively stubborn? In the U.S., we are seeing consumers slowly adjusting but not at a worrisome pace, which makes the Federal Reserve (Fed) rate decision even harder. Cut rates too fast and we could see a surge in inflation. The markets remain resilient driven by earnings, which justify current valuations even without rate cuts. So, if the consumer remains fairly strong, we think markets can still go higher from here. That doesn’t necessarily mean the economy and market momentum won’t slow down somewhat; we’ve already seen a shift in consumer spending away from Discretionary and toward Staples. But crucially, the consumer is still spending — just on different things. That’s an encouraging sign for markets as we head into the summer.
Holdings Highlight: Nvidia (NASDAQ: NVDA)
Nvidia has been one of our Tech teams’ top positions since fund inception and is currently the top holding in the BMO Global Equity Fund. Nvidia is at the forefront of AI development and has recently surpassed Apple as the largest market capitalization company in the world.
NVIDIA’s Q1 2024 results serve as an important bellwether for the entire AI industry. Despite elevated expectations from investors, Nvidia did not disappoint, and results confirmed that we are still in the virtuous stage of the AI Investment Cycle. We have seen strong demand for Nvidia’s products from both cloud customers and sovereigns. Cloud customers continue to spend to develop their own internal AI-based applications and to build infrastructure that they can rent out to others. Additionally, customers are expanding beyond traditional data centers with new demand coming from countries around the world that are investing in Sovereign AI by building up domestic computing capacity to create AI-applications using data from their country and key industries. We view this demand as broad based and in the early innings of a multi-year investment cycle.
Over the past month, we had the opportunity to travel to Asia and perform supply chain checks. While in Taiwan, we attended Computex and our initial expectations were companies would focus on showcasing consumer facing technologies, such as AI PCs. What was clearly evident in Taiwan was that every major vendor in the supply chain showcased NVDA’s latest product, Blackwell, along with other NVDA AI applications at their booths. Furthermore, NVDA has announced that they will be shortening the cadence of their new product cycles to an annual basis. Historically, semiconductors followed Moore’s Law and experienced product improvements every 12-18 months. In our opinion, this shortened product cadence is a major competitive advantage making it difficult for stand alone competitors to keep up with NVDA’s innovation. Amazon, Google, and Microsoft all have internal silicon development plans to diversify away from NVDA. These companies have to decide whether they can innovate on annual basis or simply buy into NVDA’s product cadence which may guarantee the best performance per dollar.
Our main takeaways from earnings, supply chain checks and Computex has led us to believe that there is further upside to estimates in both 2024 and 2025+ and we continue to believe Nvidia is best positioned to benefit from the AI investment cycle.
Notable Transactions This Month
- Sell: AECOM, Denso Corp, Monster Beverage, Eaton, Siemens AG, & HSBC Holdings
- Buy: Coca-Cola, L3 Harris Technologies, McKesson, Parker Hannifin, & Schneider Electric
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Sector Mix: As of May 31th, 2024
Sector Views:
| Sector | PM Views/Commentary |
| Information Technology (Malcolm White Jeremy Yeung, Marco Iaboni, & Adriana Buduru | Tech outperformed the broader market in May, with the MSCI World Information Technology Index up 8.5%. We continue to see a bifurcation within the Information Technology sector, with the SOX1 outperforming the IGV2. All eyes were on Nvidia’s Q1 2024 earnings print, which beat elevated expectations and continued to run into Computex. Despite accelerating public cloud trends seen with Azure, AWS, and GCP, software remains muted. Software Q1 earnings results indicate a more gradual macro recovery with minimal AI monetization tailwinds in the near-term. Overall, we remain positive on the sector with preference for Semis and Hardware over Software. |
Financials (John Hadwen, Goshen Benzaquen, & Kyle Mendyk) |
The MSCI World Financials Index rallied 4.7% during May, taking the YTD (May 31, 2024) return to 11.9% in US$. During the month, European financials lead performance with a gain of almost 8%, while U.S. financials returned 3%. Asia Pacific financials, which had outperformed during April, had another good month, advancing more than 6%. Insurance companies and banks generally outperformed other financial subsectors. We continue to have a positive outlook for the sector as relative valuations remain very supportive and the economic outlook is gradually improving. |
Health Care |
The Healthcare sector underperformed as it has been a source of funds for inter-sector rotation (primarily to companies levered to AI). Within the Healthcare sector, Managed Care was the worst performer, while Hospitals delivered strong returns. United HealthCare’s comments on higher cost pressure in Medicaid led to a 3-5% selloff in the group, which later reversed when Elevance provided some constructive feedback which calmed investors’ nerves. Conversely, hospital shares posted strong gains as the providers continued to see robust procedural growth and favorable payor mix. We maintain a balanced view on utilization as medical procedure volumes continue to be supportive, however we believe much of this is contemplated by current stock prices. We continue to have a positive view on Health Care as a defensive sector with unchallenging valuations, which should benefit from increased investor attention as more clarity is gained on the US presidential election. |
Consumer Discretionary |
The discretionary sector underperformed the broader market by ~4% in May, as investors continued to reduce their exposure due to disappointing corporate updates. Underperformance in the month was driven by the consumer services subsector, which saw companies such as Starbucks and Airbnb provide lackluster updates, raising concerns about the outlook for consumer spending across the subsector. |
Industrials |
Industrials underperformed this month. While specific end markets such as electrification, data centres, aerospace, and defense continue to see firm demand, broad sector conditions remain muted with no clear signal of inflection. As such, transportation lagged. We continue to favour companies aligned with secular thematic or cyclically exposed companies with idiosyncratic growth opportunity. |
Consumer Staples |
The consumer staples sector underperformed in May, led by a decline in the food and beverages subsector. Overall, the fundamentals for staples have been underwhelming, as many companies continue to face pressure from declining volumes. Most recently, investors and corporates had been hopeful that lapping reduced SNAP benefits from 2023 would provide a boost to revenue, but this appears to have had a minimal impact. |
Communication Services (Malcolm White Jeremy Yeung, Marco Iaboni, & Adriana Buduru) |
The MSCI World Communication Services Index outperformed the broader market, increasing 6.4% during May. The outperformance was broad based with some recovery in telcos and gaming, and continued performance from internet. Advertising spend continues to remain optimistic for 2024, benefitting the internet names and advertising stack. During the month, Google hosted it’s I/O conference showcasing some of its new product roll outs across search, updates to Gemini, and new generative media models from video to images to music tools. Meta and Google continue to spend on capex in order to support their AI infrastructure and should see AI tailwinds particularly within their recommendation algorithms and advertising tools. Rideshare and delivery underperformed as concerns relating to consumer spend and the potential impact of robotaxis were an overhang. |
| Energy (Hoa Hong & Hannah Ou) | Crude prices were down around 6% this month, while the MSCI World Energy Index was relatively flat as the market anticipates OPEC+ continued support by not bringing back its curtailed production. The June 2nd decision to extend the cut, should keep the market in deficit this summer driving season. Given that spare capacity is near 5%, a significant rally is unlikely, especially as we approach the weaker demand season. |
| Materials (Hoa Hong & Hannah Ou) | Metals, aside from the ferrous complex, continues it positive performance this month, with silver being a standout, up 16% this month. The MSCI World Materials Index was up 3% this month. Inflation data has moderated, and as it trended toward the central bank’s target, central banks are expected to normalize rates. In early June, Canada and the EU began to lower their rates. Lower interest rates and China’s continued loosening of policies to stabilize the property market should help support the material market. |
| Utilities (Massimo Bonansinga, Janice Wong & Alex Yang) | Global rates have begun to slowly retreat but Utilities performance has been relatively muted in May. The AI/DC (AI/Data Centre’s) thematic has given an additional boost to IPPs (Individual Pension Plan’s) in USA and, partially, Europe. But, overall, the sector has not been rewarded for their defensive characteristics. Nevertheless, the sector is well supported by high single digit quality earnings growth, and M&A activity is highlighting the attractiveness of utilities/infrastructure. |
Real Estate | Global REITs delivered positive returns in May. For the month, Healthcare, Self Storage, and Data Centers led the group, while Office, Diversified, and Lodging/Resort REITs lagged. A number of REITs released operating updates at month-end in advance of the Nareit REITWeek investor conference held in early June. Operating updates were generally constructive and supportive of FY2024 guidance. |
| Cash | We are fully invested except for a ~0-1% cash weight for liquidity purposes. |
1 PHLX Semiconductor Sector (SOX) is a Philadelphia Stock Exchange capitalization-weighted index composed of the 30 largest U.S. companies primarily involved in the design, distribution, manufacture, and sale of semiconductors.
2 iShares Expanded Tech-Software Sector ET (IGV) is a passive ETF by iShares tracking the investment results of the S&P North American Technology-Software Index.
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Publication Date: June 2024