In April the global equity market shook off any concerns of conflict in the Middle East to rally significantly, hitting record highs. In thoroughly ‘risk on’ mode, upward price moves centred on information technology companies and those selling datacentre hardware in particular. To give a flavour of market moves, in April chipmaker Intel more than doubled, whilst digital storage company Seagate was up by two thirds. Whilst there is certainly a super-normal growth story for many of these companies, the data centre and AI trends driving them are now well-known and as such should reasonably have already been reflected in market prices. Thus, moves of this magnitude in such a short space of time from an already high base speak to a market that is becoming increasingly driven by narrative and speculative behaviour rather than fundamentals.

On the other side of the trade are businesses offering an attractive combination of valuation, quality and growth, but are just not what the market wants right now. Contrast the +14% sterling increase in April of the Information Technology sector with the Health Care sector’s -3% decline. In the portfolio, pharmaceutical companies Roche and Sanofi posted organic revenue growth of +6% and +14% respectively, and positive news on their respective pipelines of new therapies. Roche’s shares were flat, whilst Sanofi’s declined -5% across the month. Medical devices maker Medtronic saw its shares decline -9% on no news, again all in sterling terms. This is despite healthcare being one of the few bright spots in the US economy outside of AI capital expenditure. This divergence is a cross-sector theme.

Whilst we understand the drivers, the magnitude of moves continues to stretch valuations in both directions. We continue to think that the opportunity being presented to investors is extremely compelling in parts of the market, but unattractive at the overall market level. Last months’ market moves only make this more so.

To illustrate, the portfolio’s free cash flow yield is over 6% and the dividend yield over 3%, both measures at highs, with an expectation of sustainable high single digit growth in free cash flow per share and dividends.