Our funds delivered strong 7.7% & 6.5% results in July. Investors’ appreciation that we are approaching peak inflation levels has resulted in strong share price performances from the highest quality businesses. Patience rewards.
The upcoming pathway to lower inflation will not be linear, but downward nevertheless given easing supply disruptions and much tighter monetary and fiscal conditions. This is explained in detail in our recent White Paper (see website). Should this disinflationary process be sustained, then it would be very positive for stocks and the U.S. economy. Its particularly positive for the most profitable companies, with the highest return on capital, fuelled by long runways of growth; the types of businesses we at Insync hold.
Markets have already fully priced-in higher interest rates, thus earnings are now the focus. Investing in the highest quality stocks benefitting from megatrends delivers strong earnings growth over a full economic cycle. This is because of the duration of the megatrends being far longer than mere themes. Recent portfolio examples include Home Depot (see below) and Walt Disney (whom recently increased ticket prices by 7% with zero impact on demand). Our holdings possess high gross margins and strong pricing power, providing strength in both high and more normalised inflation environments. Our portfolio is well positioned as a result for continued delivery of the 5 year aim of both funds, as stock prices over the longer term follow consistent earnings growth. .
Home Depot (a supersized bunnings)
… benefits from the ‘Household Formation’ Megatrend, fuelled by the all-important ‘Demographics’ Super Driver. Understanding changing demographics across all ages and segments globally is very important in identifying the winning companies of the future. One example is the escalation in the 47 year old age cohort in the United States over the next 8 years (see graph below).
The acceleration in the age 47 cohort coincides with the median average age of all home buyers, pushing up construction demand. Additionally a housing supply deficit in the US as high as 3.8m homes exists. On the renovation front, seniors are increasingly reluctant to move into aged care centres, and the increased ‘working from home’ trend further fuels demand. These are long duration strong tailwinds. Short term interest rate rises, and other macro factors are unlikely to alter this powerful megatrend.
Home Depot is a big winner of all this. Think of it as a massive Bunnings network with almost 2,000 stores! They serve both trade and DIY markets, dominating the US building supply industry and run by a highly competent management team. Despite rising interest rates their recent strong results are testament to both the strength of the company and the power of the megatrend. Home Depot delivers very high returns on invested capital with an expected 10-15% p.a. compound annual earnings growth in the years ahead.