As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.
July offered a well-needed shelter from the storm of the last few months.
Although global growth continues to slow down, inflation remains high, and monetary policy continues to tighten, many risk assets performed better during the month.
Last month we discussed how a pathway appeared to be opening up. With inflation potentially peaking and supply chains improving at the margin, the path forward may be incrementally easier for long-duration growth assets.
In a low growth environment, companies that can deliver growth become more valuable. In a low growth environment, demand for commodities should also begin to weaken (perhaps with an except for non-discretionary commodities like grains and a certain level of energy consumption). Either way, the overwhelming pressure against long-duration growth assets appears to be turning.
Interest rates will likely continue to rise, but perhaps at a more measured pace if inflation has peaked.
However, that is not to say the coast is completely clear.
The world has been engulfed in a period of elevated political and geopolitical tension. These tensions appear to be picking up near-term.
For example, what will happen in the next few days in Taiwan should Pelosi visit the island?
For example, what will happen in the next two months leading into and following China’s National Party Congress (where Xi is widely expected to stay on for an unprecedented 3rd term)? Once a 3rd term is secured and Xi’s hold on power is confirmed, will he pull back on recent aggressive policies or will he have greater freedom to do more?
For example, what will happen in the next few months leading up to and following US midterm elections? What kind of rhetoric around domestic and foreign policy will we see? How will the world (in particular, China) react?
Betting on long-duration assets require knowing something about how the world will look like a long time from now.
Some things will stay the same, and some things won’t.
It’s never been more important to think through what things will stay the same and what things might not stay the same.
What will stay the same?
Perhaps – Our need for cybersecurity since the world is dangerous and will likely remain dangerous.
Perhaps – Our need for computation and understanding of the world, especially if AI becomes increasingly prevalent in military postures of adversaries.
Perhaps – Our need for efficient commerce, logistics, and low prices, especially if geopolitical forces push western countries away from China, the factory of the world for the last two decades.
A lot of things will change, but some things will stay the same.
And with the reset in valuations over the last 9 months, we’re likely at a good time to at least think a little bit further out into the future.
Turning to the portfolio, the Paper Portfolio returned 10.4% in July vs 9.2% for the SPY. This brings year-to-date returns to -47.1% vs -12.6%, respectively. The Paper Portfolio remains significantly behind the SPY both year-to-date and since inception.
The broad indices have been quite resilient since the mega caps have held up quite well (e.g. Apple, Microsoft, Google, and Amazon), but many smaller companies have sold off significantly including many of the names we hold. In hindsight, we should not have sold down Apple last year as supply chain troubles appeared to worsen…if anything, we should have concentrated more in it. It was a mistake to think moving away from anything that touches the physical world and concentrating in select digital-oriented companies would help us weather inflationary pressures and tightening monetary policy. Turns out Apple has been one of the most resilient tech stock, despite being both tech and supply-chain-exposed.
In July, many of our holdings performed well as the indices recovered. Many of these moves were largely a function of market recovery. Semiconductor stocks did well as recent earnings releases suggest semiconductor industry continues to see good demand outside of consumer verticals. For example, ASML reported strong demand, similar to other equipment players.
The bulk of the portfolio will be reporting in August. We’ll have to see what earnings look like and what companies forecast for the coming months.
On the negative side, the key item of note is Snap.
Snap declined 24.8% in July after reporting very weak results. The company’s revenue growth has decelerated very rapidly going from 40%+ growth a few quarters ago to 13% in 2Q and about flat so far in July (and possibly negative in Q3 overall?). At this point, it is unclear how much of this pressure is due to lingering pressures from Apple’s privacy changes, rapidly deteriorating macro, and / or competition with rising peers like TikTok. It’s probably a little bit of everything. Given Snap’s immature financial profile, this is a big set-back. However, user growth and engagement remains strong for now, which leaves hope that when advertisers are comfortable spending again, Snap should be able to bounce back.
No major changes for August. Let’s see what August (and earnings) brings.
Disclosures: Of the stocks mentioned, I own shares in NET, PINS, SE, KIND, MRNA, OKTA, SDGR, U, UBER, and AYX. I have no intention to transact in any shares mentioned in the next 48 hours.
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