MARKET REVIEW
April was a highly volatile month of trade developments that whipsawed the equity market, with volatility levels (VIX) last seen during the Covid crisis or GFC. The month opened with the “Liberation Day” tariff announcement by President Trump. Although expected, the scale, breadth and methodology associated with this announcement took investors by surprise. Equities, in particular US equities, came under pressure as recession fears increased, while US rates rose on the back of the perceived risk of tariff-led inflation pressure, and the USD weakened against most major currencies. Some of these initial knee-jerk reactions receded as the US administration announced a 90-day suspension for some tariffs to allow for a negotiation period with a dozen countries, while escalating trade tension with China further. In a stark reversal of past trends, US equities were the weakest and closed the month down, while equities from other key regions ended in positive territory.
The volatility surrounding significant events such as Liberation Day creates opportunities for us as bottom-up stock pickers – as the picture remains unclear, our decisions are made on a stock-by-stock basis rather than sector by sector.
PERFORMANCE COMMENT
The month of April saw the strategy outperform the index. The strategy was exposed to a negative stock selection effect, which was more than offset by good sector allocation. Most of the outperformance was due to the thematic underweight in Energy and overweights in Industrials and Utilities. Top performers were Cadence, National Grid and Vertiv, all of which delivered double-digit returns. Cadence (next-generation chip design) and Vertiv (liquid cooling) both delivered strong results on the back of increasing confidence in investment across the AI supply chain, from semis to powering data center solutions. National Grid continues to attract demand with its resilient cash flow profile. On the downside, we saw Nextera weaken, given increased concerns around changing government appetite for renewables generation in the US. Elsewhere, Midea (an automation and high-efficiency appliance company) and BYD (vertically integrated EV manufacturer) were weak on concerns about how these businesses would adapt to tariffs.
FUND ACTIVITY
The key development in the strategy in April was our continued focus on powering the AI supply chain, where we believe recent weakness has been unfounded, as shown by the recent strong results from both those spending the capex (Megacap tech) and those providing the kit (such as Vertiv). We continued to lean in on investments in this space, adding Lam Research (semi equipment) and Broadcom (networking as ASIC) to the strategy. We also added to ASML, a high-quality semis name, through selling BESI, where we were less confident in the near-term outlook. Elsewhere, we added Uber, with ongoing conviction that the shared mobility platform provides a compelling alternative to car ownership and will play a role in a largely autonomous future. Funding these changes were some of our more defensive positions that had performed well (American Water Works, for example), as well as reducing exposure to Chinese names that had performed well despite tariff fears (CATL).
OUTLOOK FOR THE STRATEGY
In 2024, as the inflation battle seemed over, countries began to move towards more accommodative monetary policies, with rate cuts across key economies, except for Japan. The narrative of a soft landing is starting to take shape, favouring a broadening of the equity market performance into 2025, after having been concentrated in a narrow set of stocks since 2023.
Many of our themes were left behind and encountered cyclical headwinds, such as clean energy-related themes, which have seen a decline of over 20% for two years in a row. Despite these cyclical headwinds, we believe that the structural trends we focus on are firmly established. Looking ahead into 2025, we identify several attractive opportunities that are unduly overlooked and could regain investor attention.
Overall, our portfolio adheres to the principles of strong quality growth, while maintaining disciplined valuation. With our dedicated sustainability research team encompassing system changes across sectors, we are confident that the Planetary Transition strategy is well-positioned to capture investment opportunities arising from a society that is transitioning to net zero, while becoming more nature-positive and socially equitable. This provides investors with a diverse range of growth opportunities.
FUND STRATEGY
At Lombard Odier, we firmly believe that the current global economic model is unsustainable, and we recognise the ongoing transition towards a circular, lean, inclusive and clean economic model. This transition is driving fundamental changes in material systems across value chains and industries. These changes should accelerate through market inflection points, where the adoption of sustainable products and services will rapidly increase, shifting from niche to mass market. As a result, new and evolving profit pools will emerge within and across sectors.
Our investment approach for the Planetary Transition strategy is guided by a systems-change framework. We understand that these systems are interconnected with planetary boundaries. This strategy serves as the overarching approach for LOIM's holistiQ investment philosophy, focusing on various sustainable themes within key systems such as industrials, consumers, materials and energy. Additionally, we identify other opportunities for system changes that contribute to a society that values planetary boundaries and aligns with the sustainability transition.
The strategy focuses on achieving 'net zero' by prioritizing electrification and decarbonisation across key systems such as energy, industrial processes, and transportation. We invest in both solution providers and transitioners from carbon-intensive industries. The rising temperature is a key catalyst for systems change, driving the economic transformation to a net zero economy and creating investment opportunities.
