Market commentary - April 2024

At the time of writing, the first interest rate cut has come here in Sweden, which was expected. Sweden is thus cutting interest rates before both the US and the European Central Bank. The threat of inflation is most likely over and there will be more cuts ahead. However, the US economy is surprisingly strong and inflation is therefore somewhat more stubborn there. The market's belief in interest rate cuts has shifted during the year and now the market believes in a first cut for the US in September. Above all, the jobs data that have come in have been stronger than expected. However, we see a break in the trend in April when this month's data came in weaker than expected, which suggests a rate cut.

April was a month with many reports, not least from the largest tech companies. Generally speaking, the reports have been strong. As I have written about before, the concentration in the indices of the absolute largest tech companies, the so-called Magnificent 7, is historically high. For example, the Magnificent 7 make up more than 50% of the Nasdaq 100. The valuations of these companies are historically high and they have significantly outperformed the rest of the stocks in the indices. There has even been talk of the “mediocre 493” in the S&P 500, with Mag7 accounting for most of the positive performance in recent years. Historically, one can see a pattern of this return spreading to other stocks after similar record situations. I think this is likely in the future, in other words that the good returns delivered by Mag7 will spread to smaller companies.

What will cause this spread so that the market broadens? Well, the simple answer in my opinion is that we are starting to see interest rates being lowered or that we at least feel a greater certainty in how the Fed will act in the future regarding cuts. It can be noted that the historical average from when the FED cuts for the first time after their last increase is 8 months. The record ever is 18 months in connection with the IT bubble. It has now been 10 months, so a cut is sure to come. We are therefore very much looking forward to the FED lowering the interest rate and we believe it will benefit many of our holdings.

Augmented Reality Fund

The Swedish eye-tracking company Tobii had a strong month, gaining +32.1%. Although Tobii is a smaller holding, representing 1.45% of the fund, it has faced challenges with poor price performance recently. Tobii is among the companies that have been heavily impacted due to its lack of profitability. It also has significant exposure to the automotive sector, which has experienced declining demand. Recently, Tobii completed an oversubscribed share issue, raising around SEK 300 million, which offers a new opportunity to reach its profitability target, now within closer reach.

The fund's worst-performing holding was Autodesk, which fell by -18.0%. This American software company, known for its essential 3D graphics and AR programs and recent AI initiatives, announced a delay in filing its annual report due to an internal review regarding the handling of certain financial ratios related to cash flow. While we do not expect this to have a major impact on the company in the long term, it has understandably caused some short-term concern.

Apple estimated sales of approximately 500,000 Vision Pro units this year, but so far has delivered between 200,000 to 300,000 units, indicating a need to catch up. Recently, the media has given more attention to critics pointing out declining sales, calling Vision Pro a potential failure. As I have previously mentioned, this pattern is common whenever Apple launches new products, and it’s already happening just three months post-launch. While the product currently has a limited number of apps and is relatively expensive, this is merely the beginning. Interestingly, the Vision Pro has received a warmer-than-expected reception in industrial sectors, including automotive, healthcare, and film. I am confident that Vision Pro will follow the same successful trajectory as Apple’s past product launches over the past 40 years, such as the Mac, iPod, and iPhone.

eSports Fund

The Swedish eye-tracking company Tobii had a strong month, achieving a +32.1% increase. Although Tobii is a smaller holding at 2.43% of the fund, it has endured a challenging period with poor price performance. Tobii is among the companies that have faced significant setbacks due to its lack of profitability. Additionally, it has substantial exposure to the automotive sector, which has experienced declining demand. Recently, Tobii conducted an oversubscribed share issue, raising approximately SEK 300 million, providing an opportunity for a fresh start and placing it closer to achieving profitability.

Fragbite, which operates the largest eSports platform in the Nordic region, saw a steep decline of -46.9%. This holding accounts for 0.52% of the fund. With only SEK 25 million in cash at the end of the year, the likelihood of requiring new capital is high, though no announcements have been made yet. This uncertainty has likely contributed to nervousness in the stock price.

As I have discussed previously, mobile gaming is the fastest-growing and most profitable segment of the gaming industry. Xbox appears to be the next major player in this area, as Microsoft recently announced plans to launch its own Xbox “gaming store” for mobile, starting with games like Minecraft and Candy Crush this summer. This store will only be available in web format to avoid reliance on giants like Apple and Google, which would be necessary if it were launched as an app. Many of Activision Blizzard’s titles are successful in their mobile versions, which likely contributed to Microsoft’s decision to acquire Activision Blizzard and signals its commitment to expanding in the mobile gaming market.

Space Fund

The only holding in the fund with a positive return this month was the Swedish satellite company Ovzon, which gained +10.4%. There are few listed Swedish companies in the space sector, and the fund includes only two: AAC Clyde Space and Ovzon, both operating within the satellite industry. These are smaller, high-risk companies that are not yet profitable, and therefore represent smaller positions in the fund; Ovzon currently accounts for around 0.6%. In Ovzon’s April report, it was evident that order intake has increased significantly. Ovzon provides mobile broadband services and earlier this year launched its first satellite, Ovzon3, which is currently on its way to its designated orbit as planned, with deployment preparations underway. Ovzon3 is expected to become operational in mid-2024, broadening Ovzon’s service capabilities.

On the downside, last month’s best-performing holding, Velo3D, was this month’s weakest, declining by -49.3%. This drop resulted from the company’s announcement of a public offering, which negatively affected the share price. This was anticipated, as we previously highlighted that capital remains a scarce resource for this space-focused 3D printing company.

SpaceX dominates the satellite constellation market, having launched its first satellites four years ago, with 5,402 Starlink satellites now in orbit providing internet access. Subscriber revenues are projected to be SpaceX’s largest revenue source this year. The company is increasing its satellite launch pace, now with the capacity to deploy around 200 satellites monthly. The cost of the Starlink antenna for customers has decreased significantly over the years, thanks to improved efficiencies and economies of scale; it is now available for under $600. This strengthens Starlink’s position as a world leader and enhances accessibility. Interestingly, SpaceX has recently developed the capability to decommission larger numbers of satellites. They discovered an issue with an early satellite version and plan to take approximately 100 of these out of service in the coming weeks, without impacting customers or other satellites.