Mid Wynd International (MWY) announced its annual report for the year ended 30 June 2023. The company’s share price rose by 1.0% on a total return basis. NAV total return was 5.6%. This compares with a rise of 11.3% in the company’s comparator index, the MSCI All Country World Index. The share price total return is lower than the NAV return owing to the move from a premium to NAV at the start of the year to a discount at the year end.
Commenting on the performance, chairman Russel Napier noted that:
“The last twelve months have seen a rise in global equity markets and a rise in the net asset value of our Company. The rise in the NAV of Mid Wynd has not kept pace with the rise in our comparator index. With major structural changes impacting economies, businesses and geo-politics the global equity markets are seeking to price in what the long-term consequences of these changes are for corporate earnings and equity valuations. In our current financial year they concluded that technology stocks are best placed to profit from these structural changes and there has been excitement around the prospects for earnings from artificial intelligence (AI) which, for some, heralds yet another structural change. Our company has invested in the technology sector and benefited from some of this excitement but not to the extent that the comparator index has benefited. Accurately reflecting all these major structural changes in the price of equities is something that is likely to be achieved by financial markets only over many years. The role of our managers is to see through the short-term volatility associated with such changes and invest to benefit from the developing longer- term trends.”
Regarding the outlook, he continued:
“The steep rise in interest rates since 2020 has not produced the scale of economic deceleration and perhaps even financial distress that might have been expected. Such a reaction to higher interest rates in 2008 caused a contraction in economic activity, bank collapses and huge losses for equity investors. Despite record high levels of debt, relative to GDP, both the public and the private sector have, so far, been able to service their debts and debt defaults have remained constrained compared to other economic downturns this millennium. This resilience probably primarily reflects a move by many debtors to extend the duration of their borrowing and lock in low interest rates in the period of very low interest rates that pertained up to 2020. Even so debt is always maturing and as it is refinanced the higher costs of servicing that debt will lead to greater strains for those seeking to service their debts. The clock is thus ticking for debtors as their debts are refinanced at higher rates of interest. The data on private sector debt service ratios, which show the proportion of private sector income currently needed to service debts, indicate that many countries, are at a level where historically their private sectors have defaulted on their debt obligations and these ratios will continue to deteriorate as debt is refinanced. Perhaps surprisingly the private sector debt service ratios of the United States, United Kingdom and Japan are reasonable but for some large and important countries, such as France and China, a dangerously high level of private sector income is being diverted to service debts. The impact from rising interest rates on economic growth, financial stability and equity prices has been benign but as time ticks on and debts are refinanced at higher interest rates this is likely to change. Investing in those corporate cash flows that can remain robust even in such circumstances can protect investors from the worst effects of any economic contraction that may come as the impact from higher interest rates hits the private sector. Companies with high returns on capital and low debt levels should be better placed to weather economic contractions when they come.
“It is not easy to discern the major trends that are developing during a period of rapid short-term changes and general volatility. One trend though is becoming more apparent. That is that governments are intervening to create outcomes that they believe should not be left to market forces. That is a trend that involves both the socialisation of private sector risk, as we saw with the significant government support for the private sector during the COVID-19 crisis, but also in the form of governments co-opting or cajoling corporations to assist in delivering their political goals. This is a trend that is very likely to continue as governments react to what are the growing list of ‘crises’ confronting the electorate – climate change, war in Europe, a cold war with China, higher cost of living etc. While such intervention may mitigate the extremes of the business cycle it comes at a price for savers in the form of greater government interference in the allocation or private capital / savings. History suggests that such government interference rarely results in higher returns on capital for the companies so co-opted by governments. A well-chosen portfolio of equities may be one of the few places for investors to hide in such a world particularly by investing in the high-quality companies that can continue to produce high returns on capital even during such shifts in the balance between markets and governments.
“Savers face new challenges but rarely are they unique challenges. History provides some guidance to the future and it suggests that well managed companies, producing high returns on capital and bought at good valuations will provide positive real total returns. Our managers have the freedom to seek out those companies wherever they may be in the world and we expect this ability to find those companies to benefit our investors.”
MWY : Another challenging year for Mid Wynd International