Global Security Fund månadsrapport – augusti 2023

Global Security Fund Monthly Report – August 2023

Despite vacations in Europe and the US, August has been eventful in terms of macro, geopolitics, corporate news and reports.

The stock market has been weaker during August and especially clearly in Sweden, which was down close to 3 % while MSCI-World TR was down approx. 1.8%. The interest rate on the US ten-year government bond has risen during the month and was well above 4%. It has affected and created anxiety in the US stock market and has particularly negatively affected technology and growth companies.

The fund was down 0.69% mainly on concerns in the cyber security sector and forward demand. It was above all Fortinet that lowered expectations after they left weaker guidance going forward and that took the sector down with them. There was continued concern ahead of industry-leading Palo Alto's quarterly report, especially when it was decided to be released on a Friday night, leading to questions about potentially negative news. However, the company reported very strongly, with continued high demand and high growth. This caused the sector as a whole to recover and above all the company itself rose after a period of decline. Palo Alto is found in the portfolio as the largest holding in the cyber security sector together with Microsoft and is the company that developed the strongest (+66 %) for the year. The fund's holdings in Crowdstrike also reported strongly at the end of the month. It shows that the sector continues to have great demand and growth potential, and there should also be a prerequisite for recovery in Fortinet, as the company may well have been hit hard by weaker guidance and a more conservative view going forward.

The development in American defense companies is holding back the fund's results on a full-year basis, but the companies are still exposed to large investments and increased profitability. Some of the companies such as Raytheon, Boeing and Lockheed Martin have been dragged down by problems in manufacturing and delayed deliveries and where Raytheon went down as a result of component problems in engines for commercial aviation. The fund nevertheless assesses the problems as limited and short-term, and with good future prospects for the companies, they should have good development potential.

The companies that performed the strongest during the month were Cisco (+10 %) and Teledyne (+9 %), while Fortinet (-22 %), Caci International (-6%) weighed the fund the most. None of the companies has a particularly large weight in the portfolio. The reporting period can be summed up as positive as the companies and the economy show resilience and concerns about declining profits and growth have not materialized yet. The labor market, especially in the US, where the fund has the greatest exposure, also proved resilient and strong. US unemployment rose to 3.8 % from 3.5 % the previous month, while the labor force participation rate increased slightly. Wage increases were also slowing in August, which is important in order not to force the FED to act. As a result, August's job figures were fairly positive for the stock market in that the job market remains strong, but it did not produce any further inflationary pressure.

There was concern ahead of the year that H1 2023 would be weak and we would see a recovery in H2 2023. After a strong stock market in H1 2023, we may instead have the reverse with more concern in H2 2023. From that perspective, the fund is still in a good position in being exposed to megatrends that exhibit growth. Our intention is also to contribute with diversification against a geopolitical situation that continues to be strained.

On the international scene, the US Secretary of Commerce, Gina Raimondo, has met her Chinese counterpart, Wang Wentao, and the meeting has drawn attention in terms of the tense relationship between the US and China and the discussion around decoupling, i.e. that the economies would try to disconnect from each other, at least the US would preferably avoid trading with China to a large extent. However, the world's largest economies are interdependent and reducing trade and interdependence needs to be done over time if it is even to be a stated objective and strategy.

In his foreign policy agenda, Biden has clearly identified China as the biggest threat to the United States and its strategic position. As export restrictions and bans prevail and discussion about this would take place, the following statement is interesting: "The Commerce department will not discuss export control that relates to national security". It certainly sounds reasonable, but the signal value and message is rather that the US is not prepared to give China the conditions to strengthen its strategic position, let alone use American semiconductors for China's defense industry. The intention here is probably mainly to dampen the voices and we probably won't see any major breakthroughs in general. The US is considered to have a strong position in the world's most important bilateral relationship and it is likely to be good if this is highlighted and reflected in strategy despite temporary and short-term concerns.

China's long-term strategy of "two-sided circulation" is reflective of how the country acts. China aims to become a consumption economy and less dependent on exports. Furthermore, China wants to refine its own production and become a high-tech trading power instead of supplying the final products of others. In addition, they want to improve innovation and reach higher levels of self-sufficiency in key areas. Finally, they intend to ensure access to critical resources, including natural resources. China has some way to go and in the attempt to become a self-sufficient consumption economy, it is therefore natural to now make demands on China in trade relations and collaborations, as China is dependent on export and trade relations. The EU should also set these requirements. The timing is probably especially good now because China is in a vulnerable economic situation. The EU is more dependent on China than the US is.
China is not currently participating in the G20 meeting in New Delhi and the reason is considered to be China's and India's more tense relationship and conflict over land claims between the countries. It has to do with access to natural resources just listed. India is now also courted more by the West and production in China has already started to be moved from China to India, among other places. Putin is also not attending the G20 meeting as he is internationally wanted by the International Criminal Court in The Hague.

What has been summarized above is interesting because it creates geopolitical problems and challenges that will not be solved in the short term. This means that the uncertain situation and the actions of Russia and China require greater investments in defence, total defence, space and cyber security. These are trends that are structural and will last for a long time and lead or at least influence the macro economy that affects the development of our stock markets.

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