Market Review
Markets began the year in reasonable form with early gains for both the UK and Global equity indices. There were however, some extraordinary moves taking place beneath the surface. Investor enthusiasm for AI has evolved from the initial rush to gain exposure to AI chipmakers, to fear surrounding which established companies might be hurt by others deploying AI capabilities to create new competition.
Particular attention was directed toward companies rich in Intellectual Property (IP) with industries like software and data management coming under severe selling pressure. Natural resource industries fared better, with little prospect of AI creating alternatives to energy or metals.
But then on February 28th the US and Israel attacked Iran. With the conflict rapidly spreading out across the region as Iran retaliated, investors were faced with higher energy costs and the risk of material disruptions to the flow of trade. Markets sold off aggressively in response.
Interest rate expectations were impacted by the conflict. Higher energy prices tend to raise inflation over time and central banks seem likely to either defer planned reductions or possibly even raise rates to try and stem the inflationary pressures. This impacted industries like housebuilding, where higher mortgage rates are likely to limit consumer demand for new properties.
By the end of the quarter the MSCI Global equity index was 1.6% lower and some 4.6% below the level it had reached before the conflict began. UK markets fared a little better, with the FTSE All Share Index delivering a total return of 2.4% over the quarter. This was some 6.7% lower than the market’s pre-conflict level.
Oil prices rose substantially in response to the attacks and unsurprisingly the Energy sector delivered the strongest performance globally, rising by 37%. The laggards were Financial Services, IT and Consumer Discretionary sectors, falling as much as 11%.
Fund Review
The fund delivered a return of -6.66%, which was a meaningful underperformance of the wider market. The volatility in the prices of IP-rich businesses was a major contributor to this underperformance. This was only partly offset by good contributions from some of our AI-driven holdings.
Our lack of energy holdings was a headwind once the conflict in Iran commenced.
Total Return (%): Fund v Index v Peers
01/04/2021 to 31/03/2022 | 01/04/2022 to 31/03/2023 | 01/04/2023 to 31/03/2024 | 01/04/2024 to 31/03/2025 | 01/04/2025 to 31/03/2026 | |
|---|---|---|---|---|---|
HL Select Global Growth Shares A GBP Acc | 3.0 | -5.6 | 21.3 | -1.9 | 1.99 |
FTSE World TR GBP | 14.9 | -0.7 | 22.5 | 4.8 | 19.4 |
IA Global | 9.0 | -3.2 | 16.9 | -0.1 | 11.5 |
MSCI World NR USD | 15.4 | -1.0 | 22.5 | 4.8 | 16.4 |
We can attribute the performance of TSMC, BE Semiconductor Industries and Disco Corp firmly to positive sentiment surrounding the growth of AI investments. Taiwan Semi is the world’s dominant producer of the most technically advanced AI chips. BESI enables chipmakers to further enhance the power of microprocessors whilst Disco Corp’s precision manufacturing equipment is used in the production of advanced silicon chips. All three are expected to benefit from the hundreds of billions of planned capital expenditures that have been announced by major AI firms.
Motorola Solutions delivered well-received full year results and highlighted plans to boost profit margins further in the year ahead. We think Motorola Solutions has successfully built a dominant presence in the market for first responder communications equipment and that it is now well placed to capture greater upside from its higher margin software and services revenue streams.
We spent much of last year wondering why Linde plc’s stock was not performing more strongly, for it appeared to be delivering operationally on all fronts. This year it appears the market has come to a similar conclusion and has begun to re-rate the stock, despite no real new catalyst emerging.
Microsoft has suffered from concern over the pace of capital commitment to AI being witnessed and the uncertainty over the returns that may ultimately be earned upon them. There is also concern that major AI investors may be under-reporting the depreciation of their silicon assets.
Autodesk, Phreesia and GoDaddy all fall into the category of “At Risk from AI” that we discussed earlier. Software as an industry has seen significant underperformance in recent months. We are more sympathetic to the idea that AI could pose risks to GoDaddy and Phreesia, whilst we think the scale and embedded nature of Autodesk’s product suite offers greater protection.
Airbus makes airlines and wars disrupt passenger air travel and the demand for leisure and business travel. Some near term impact to the stock from the conflict in Iran is to be expected then, but only the more extreme possible outcomes from the war are likely to much affect the longer term delivery of value from the company’s portfolio of class-leading aircraft.
Outlook
The months ahead will hopefully see some sort of a resolution to the conflict in the Middle East, possibly Ukraine too.
The Middle Eastern conflict remains ongoing at the time of writing. This makes it especially difficult to make predictions with confidence. The longer that oil and gas shipments are unable to traverse the Straits of Hormuz, the greater the scope for disruption of economies becomes. This can be in the shape of fuel shortages or the shutdown of industrial processes due to feedstock shortfalls.
Inflation and interest rates are also less predictable. Central banks will not wish to allow inflation to become further embedded, but nor will they happily risk recession by hastily raising rates.
The AI revolution is ongoing and the quantum of capital being staked on building out the physical infrastructure to support this is breathtaking. This should provide a degree of support to economic activity, especially in the US where much of the AI build is taking place. However, much of recent market activity has been driven by concerns over the scope for the disruption of existing businesses, especially those operating in data and IP-driven sectors.
Politics can be unpredictable at the best of times. Currently we have President Trump in the White House, whilst in 10 Downing Street Prime Minister Starmer commands a massive majority in the House, but a polling performance in the mid to high teens with the prospect of challenge rising. There is an acute need to re-examine spending priorities across European nations, but little sense that the current crop of political leaders have much appetite to rock the apple cart.