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March 2023 Monthly Update

Both funds again outperformed the benchmark over the month and for the quarter ending 31 March.

As we have consistently shared in prior letters, stock prices follow sustainable earnings growth over the longer term. This is why our portfolio only consists of highly profitable businesses that continue to compound their earnings and can remain resilient during most macroeconomic conditions - including recessions. Last year’s rapid rises in interest rates led to indiscriminate selling in equities across both high and lower-quality growth companies. Higher quality stocks are, as expected being viewed now as good to hold because of their earnings and durability - hence the higher returns being achieved.

Markets are worried about the impact on economies from the fastest-increasing interest rates in history. They fear deep recessions and significant falls in earnings. This is likely true for many sectors and companies, but not all. The earnings of the companies in our portfolio continue to grow through the prevailing macroeconomic conditions. This is because they benefit from the tailwinds generated by megatrends and are also financially strong. This provides them with long runways of growth opportunities and resilience in economic downturns.

Our approach provides a winning strategy over the full investment cycle, and particularly in an environment of high earnings uncertainty, recession risks, banking sector stresses and the like that tighten credit conditions. Insync avoids sectors where the risks to earnings are high from the above and where profitability through the cycle is low (Think banks, energy, and resources as prime examples).

Let’s illustrate this with the banking sector: Banks require a lot of leverage to make an adequate return on capital. They are typically geared 10-20x. This level of leverage makes banks very sensitive to any downturn in the economy. Despite their high leverage, the average ROE across US banks is only circa 11%. Our average ROE and ROIC in the Insync portfolio are closer to 40%! Importantly it’s achieved with significantly less leverage, thus significantly less risk in a recession too.

A once in a generation opportunity

Good returns with less risk

A revolution in global consumption is occurring. Imagine a world where the centre of economic gravity shifts away from Europe & North America. This presents a staggering $10 trillion consumption growth opportunity over the next decade. This global megatrend has reached a critical tipping point. The rapid expansion of middle-income sectors across developing countries, particularly in Asia, is reshaping the global economy.

Not Just a China Story

Whilst China's middle-class growth is well-known, it is less recognized that of the 1 billion Asians joining the middle class by 2030, 380 million will come from India, the largest contributor to this increase. India's consumer market is set to triple to $6 trillion by 2030, making it one of the biggest consumption stories.

India's consumer class is characterized by a young, geographically dispersed population. It offers significant potential for growth in consumer spending.

In contrast, China's consumer class is older and aging, although more affluent, and is concentrated in cities.

Smaller nations in Asia are still juggernauts when compared to say, Australia. Indonesia’s middle-income class is the size of Australia’s entire population. Then there is Malaysia, Vietnam, and so on.

Navigating the risks

Investing in the emerging middle-income consumer requires smarter research and better insight than ever before. It also requires strong risk management.

Simply buying a basket of offshore companies with large ‘footprints’ in these regions is no longer sufficient. Nor is investing directly due to the more risky and volatile nature of local stock exchanges.

International brands face challenges when embracing Guochao due to potential repercussions in both Human Rights and political considerations. Nike and Adidas lost market share in China to locals such as Anta Group as a result. Guochao is especially popular amongst the 270 million Gen Z-ers. They’re redefining China's consumer economy and will continue to do so throughout their life stages. This is neither new nor particularly Asian. It shares similarities to the emergence and power of the USA Baby Boomers decades earlier. The preferences and spending habits of this large rapidly growing group are therefore crucial to understand.

With a higher-income middle class estimated to hold 160 million households by 2030, China remains a critical target group for consumer brands. They are driving demand for higher-quality goods and services, from healthcare and education to luxury goods and travel.

Given the dangers and challenges in these markets however, how can an investor benefit without taking on undue risks?

Being focused and careful

Insync’s research targets only the most viably attractive companies, focused especially on the increased spending by higher-income middle-class consumers (annual disposable income is $45,000-$100,000 (PPP)). Global companies are usually better placed to then allocate capital to these economies and manage currency and political aspects from a stronger position than fund managers.

Our work has determined that the number of companies benefitting from this trend that can also grow profitably going forward is fewer than what was available pre-Covid. Stock selection is key.

Equity Trustees Limited (“EQT”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.
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