Diversified Global Dividend Investing in a Concentrated Market Landscape

This year has been even more concentrated than last year. And I think this reinforces the case for diversification even more.

What are your thoughts on the U.S. equity market?

The U.S. equity market in the last year and a half has been driven almost entirely by the hopes and dreams about the AI revolution and the fruits of that labour that will come in the future. We take a more balanced view when we're in these types of markets. We're staying focused on diversification, finding the opportunities around the world, but also keeping an eye on where we see growth in the future. So we participate in some of these companies, but we keep a level head around what the reality of this is going to be. There are some parallels that come with 2000, 2001 around the hype, but at the same time, those ideas did take time to manifest themselves. So when we're in these narrow markets, we keep a diversification mindset first.

Where are you finding opportunities on a sector level?

At the sector level, we see a lot more opportunity in certain industrial end markets and industrial holdings than we have in the past. So we've been spending more of our time looking at the aerospace sector, looking at the waste sector, looking at the non-residential construction sector. Because we're finding those individual companies that are dominant in their value chain, they're seeing acceleration in their growth, and they have a good solid capital return discipline underpinning the management team's philosophy as well.

What geographic areas look compelling?

I think there's a lot of future opportunity that I'm excited to participate in in Europe and the United Kingdom. So right now we're seeing the equity markets face a little bit of instability in Europe, specifically France and also in the UK as they're going through an election cycle. The market loves stability and it hates uncertainty. And there's nothing more uncertain than an election. So we see the opportunity as great global leaders with strong capital discipline are trading off as part of the French election cycle and the UK election cycle. We're looking forward to adding our exposures, especially on the European mainland and the UK.

Can you give an example of your value chain analysis?

So one perfect example of the output of our process is a company that we've owned for years called Praxair Linde. Now Linde is unique in its value chain because it actually participates across industrial production output as a whole. So if you're a refining company, a steel mill, a semiconductor foundry, and every other type of specialized high performance manufacturing that we need in the world today, you need very specialized gases. So we're talking pure oxygen, pure argon, pure hydrogen, and you need it at scale. And Linde offers those capabilities. So they co-locate with these specialized facilities and then they have the opportunity to have a regional monopoly around all the other uses and demand for those specialized gases around these major facilities.

So if you're in Seoul, Korea where you have a major Samsung foundry, then 200 kilometers around Seoul, Linde has the opportunity to sell it on a merchant basis to all of their local partners over there as well. And that's true in every part of the world. So we see Linde as a unique operator where they attach themselves to the local leader, they benefit from the local ecosystem, and they sell it in fixed-price contracts with high returns on capital run by a disciplined management team.

Do you still think 2024 is about diversification?

This year has been even more concentrated than last year. And I think this reinforces the case for diversification even more. Because NVIDIA has been pulling up an entire basket of companies that are direct counterparties to it. We haven't seen this level of concentration since the iPhone product cycles in their earliest years. So that does create risks structurally to the market underpinning it, because if there's any issue whatsoever with NVIDIA's demand, with any supply issues from the foundries or the liquid cooling or the copper, any bottlenecks that manifest themselves have the opportunity and the risk of rippling across entire sectors of the market. So I think this year is even more proof that staying diversified is the right approach for clients.

Recorded on June 27, 2024. For definitions of technical terms, please visit iaclarington.com/glossary and speak with your investment advisor.

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