While there is plenty of geopolitical noise to decipher at the moment, it is company reports that cut through to what is happening on the ground.
We have doubled our focus and attention on corporate performance and valuations while keeping an open ear for news that might materially affect portfolio companies and the wider universe of businesses that meet our criteria.
From consumer goods to business services demand and the continual AI debate, we take the pulse of key industry sectors.
Patchy consumption
Dampened consumer sentiment around the world continued into the fourth quarter of 2024, with revenue growth for many consumer goods companies slowing to the low single digits on average. Despite this, Unilever’s turnaround seems to be bearing fruit, with the company posting consistent revenue growth across geographies and segments, driven by its beauty and wellbeing division.
Encouragingly, this is led by volumes, with a lesser contribution from price increases. However, the sudden departure of CEO Hein Schumacher indicates that the company believes performance could be even better. The well-regarded Fernando Fernandez, who we previously met as CFO, succeeds Schumacher, and we will continue to engage in order to find out more about his plans for the business.
How life insurance can benefit your health and wellbeing over the decades
Sponsored by Post Office
At the weaker end of the scale were the alcoholic beverage businesses, with six-month revenues up marginally for Diageo and down a little for Pernod Ricard.
Destocking trends are persisting, although there are some signs of stabilisation – Diageo is expecting a sequential improvement in the first half of the calendar year (second half of the company’s fiscal year). For Pernod, volumes are improving, but revenues declined due to the mix of products being sold – a trend expected to continue in the short term before stabilising later in the year.
Spending on items at the more discretionary end of consumer purchases was mixed. In a completely different consumer area, bicycle components maker Shimano seems to be emerging from the volatility of demand seen through the coronavirus pandemic.
The company is expecting to return to trend growth rates and China was unusually strong for bike sales last year in the context of a consumer recession, with Europe dragging. We expect this to reverse, with the important European market returning to growth and coming more into line with the fast-moving consumer goods companies in geographic terms.
Half of EssilorLuxottica, mainly a consumer goods business in the form of sunglasses, experienced strong growth in its Sunglass Hut franchise and its Europe, Middle East and Africa segment has grown for 15 quarters. The market has got very excited about the prospects for its tie-up with Meta for their smart glasses range, which has seen strong demand.
AI innovation leads demand…
Demand from professionals for software and data-driven solutions is robust if results from RELX and Experian are anything to go by. RELX’s risk business continues to grow strongly, but interestingly in the current AI context, the mature segments of science, technology and medicine (STM) and legal are experiencing higher growth rates than in recent years.
RELX’s Lexis Protégé is a legal AI personal assistant, and in STM, three AI tools were launched in 2024. One, ClinicalKey AI, helps physicians quickly search for information on complex cases from curated content from journals, textbooks and clinical overviews – an understandable use of the technology.
However, in industry, discretionary spending has somewhat stalled. IT consultancy and outsourcer Capgemini reported that business demand is mainly about efficiency programmes rather than investments in expansion. Where there is demand, AI is the number one area of spending, followed by cybersecurity – certainly a sign of the times.
…but can we believe the hype?
One of the biggest investment questions du jour is whether the benefits of, and ultimately value derived from, AI will meet the hype. As big sums of money are being poured into the development and delivery of AI tools, big market values are being placed onto those companies deemed to be in the AI sphere.
Business service companies Wolters Kluwer, RELX and Publicis have been brought into the AI orbit in market valuation terms. As noted above, there are some signs that revenue growth rates are increasing as a result of delivering AI tools to customers.
Though we are not AI sceptics, we believe the market is putting a reasonably full value on these businesses’ enhanced prospects, and have reduced position sizes to reflect this.
In terms of ‘pure IT’ players, Microsoft is the most significant holding in the Evenlode Global Income Fund. It is one of the big spenders of capital on AI model and service development, and related cloud service infrastructure along with the other ‘hyperscale’ providers such as Alphabet.
As investors, we are keen to see growth in revenue and profitability come through as a result of this spending, but equally understand that technology adoption takes time despite the rapid pace at which the world seems to turn in the 2020s.
Ben Peters is portfolio manager of the Evenlode Global Income Fund
