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  • Eugen Neagu

Letter to our investors – 2023 Q3

Updated: Oct 26, 2023

The third quarter was relatively quiet, with no increases in interest rates in the UK and the U.S., only a couple of increases in Europe where the European Central Bank (ECB) took the reference rate from 3.50% to 4%. The overall message from Central banks is that interest rates will be “higher for longer”.

Equities (as per MSCI World index) were flat, and Sterling Bonds (as per FTSE Actuaries UK Gilts All Stocks index) were slightly down. It is worth mentioning that Sterling has devalued by 4.2% in this period against U.S. Dollar.

The recovery in the technology sector which was fuelled by Artificial Intelligence (AI) ended, with only three companies (the best ones) continuing with positive performance in Q3: Alphabet (+8.40%), Meta Platforms (+4.61%), Nvidia (+2.84%), added to this Palantir Technologies (+4.37%) which is not part of the seven mangificos. The other four “magnificos” underperformed S&P 500: Tesla (-4.41%), Microsoft (-7.28%), Apple (-11.75%), Amazon (-2.50%).

The two important healthcare companies that we invest in Eli Lilly and Co and Novo-Nordisk A/S have had another good quarter, 14.5%, and respective 12.4% up, solidifying their leading position in treating obesity. All above stocks’ performance figures are in USD.

You may have seen our paper on sectors contributions to portfolios performance here.

As a result, we have decided to present the sectors performance for S&P 500, noting that similar performance would be in the MSCI World sectors too:

In terms of performance, it was the energy sector which did well this time. Due to the war with Hamas, this sector is possible to continue to do well in Q4. The communication sector is heavily reliant on Alphabet and Meta, plus Netflix, the other companies like Comcast, T-Mobile, AT&T, Verizon, Walt Disney, Electronic Arts, and Warner Bross Discovery are struggling a lot. The first three companies (Alphabet, Meta, and Netflix) have 60% of the sector index.

We think that Alphabet and Meta will continue to add value in the Q4 as well, and we expect a comeback of the consumer staples sector as well, if things get tougher in the world.

We are reducing the equity exposure and increase cash, as we see less possibility of getting investment returns. We have added a small allocation to Indian equities, which we see as a strategic allocation for many years. India is the highest democracy in the world (with its own problems), they work hard and have built some great companies listed on the stock exchange. Its demography is very good, young people learning skills the hard way, which creates business opportunities.

For most clients we are adding a bit of Japan equity exposure, for the majority in the form of two companies Nippon Television and Toyota Motor and Co.

Nippon TV has historically generated very stable operating income, some of which it has paid out as dividends but most of which has been hoarded over the years and invested in other Japanese companies. It is here where the opportunity exists because with a market cap of $2.5bn, we are only paying 8x historic operating income. But Nippon TV also has net cash and short-term investments of $669m + an investment portfolio worth $3bn which we are “getting for free.” If Nippon TV follows the lead of many of the other Japanese companies and starts returning cash to shareholders, there is substantial upside. If they don’t, which would be at odds with the trend in Japan, we have the safety of owning a company below the value of its cash and investments.

Toyota Motor is the Global leading car producer, selling cars under the Toyota and Lexus brand. It expects to sell over 8 million cars in 2023, making around $21 billion in net profits. It has a market cap of $236 billion, meaning a 11x multiplier of net profits, a very low multiplier for this leading company. The reason we invest: Toyota owns most patents for solid state electrolytes. It declared it now has the technology to produce safe and reliable solid-state batteries using its newly discovered sulphide solid electrolyte and has signed long term contracts with a chemical company (Idemitsu Kosan) to produce the compound and it is building its first “battery factory” for this type of batteries. Commercialisation of solid-state batteries cars are expected to start in 2027, cars which will charge faster and will last more than 600 miles (some even 1,000 miles) on a charge.

In short, we are purchasing a company which is profitable, and has a way to catch-up with Tesla and China’s BYD Company in the EV sector, without paying over the odds as for the other two.


A “moat” or “barrier to entry” really exists when the competition is happy to speak about it. This is the example of Google’s search engine, recently the Microsoft’ CEO admitted that after investing $100 billion in Bing and Artificial Intelligence (ChatGPT), Microsoft remains a “very, very low share player” in this sector.

A word on the war in Gaza -

We are concerned this could lead to an oil blockade as in 1973, mostly by Iran trying to blockade the Hormuz Strait, where 35% of Oil exports and 28% of Gas exports go through, which could send oil prices to $150 or even higher. If that happens, most likely the Global economy will end up in a recession, and stocks could drop significantly, and even move inflation a few percentages up. We have a good Oil and gas producer exposure, and we are reducing a bit the equity exposure to cash.

A second issue is the bond market which remains very volatile, with the FED Chairman even encouraging its volatility to avoid a decision to increase again the reference rate at the next FED meeting. The decision to “hold them higher for longer” seems to create this issue. The bond market is trying after many years of financial suppression to figure out what the “term premium” should be.

This however has a lot of negative effects, as many companies are trying to borrow, and could find themselves in bankruptcy if they cannot get their corporate bonds issued. These are usually utilities, and REITs which are already heavily leveraged, and have bond redemptions to meet soon, so they need their new bonds to find buyers and not pay over the odds as interest.


I will close by reminding you that most likely you are in what we name the “fragile” period (age 55 to 70) where real investment performance is very important. Your financial plan has clear growth assumptions and not meeting those, would mean that financial objectives around retirement will have to change. We are working hard for you to avoid this happening.

Past performance is not a guide for future investment return.

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