Ninepoint International Small Cap Fund Market View

June 05, 2020

Dear Clients and Colleagues:

Despite the job losses seen over the past weeks, some categories within the consumer space have remained relatively strong during the health crisis, thanks to the positive effects of stimulus programs, lower personal taxes and changing consumer behaviours.

As retail reopens, some retail owners estimate that 30% of stores could stay closed due to supply chain or inventory issues, a lack of proper health measures or financial difficulties. We have been seeing an acceleration in bankruptcies (J.C. Penney, Debenhams, Aldo, etc.), and the situation could remain gloomy for a while.

That said, some retail categories will outperform: online retailers with strong logistics capabilities, strong and well-known brands, hardware stores (DIY), food & essential products, even decoration and furniture, as working from home could mean increased spending on home office supplies and furniture.

Based on various retail sales reports and some company interviews, we have concluded that consumer demand has shifted to certain hardline, home-related categories, resulting in some of the highest levels of growth these retailers have ever experienced. The use of money earmarked for out-of-home expenses to home-related ones has played an important role.

DIY stores, pool equipment and landscaping are also seeing a positive trend, as consumers continue to spend more time at home and in their gardens. We believe that the home-related expenses could remain at the core of spending for a while.

When it comes to leisure and hospitality, demand is improving but remains weak. Although domestic tourism will undoubtedly offer some relief, it is unlikely to fully compensate for the losses incurred from international travel restrictions.

Significant restrictions placed on hospitality operators, such as maximum occupancy levels in hotels, and stringent health and safety regulations are likely to dampen revenue in the short term. Businesses will have to consider price hikes to compensate for the reduced capacity.

With the absence of international tourism flows, the luxury sector is likely to suffer in the coming quarters. Tourists represented 40% of the sector’s revenue, and we don’t expect international airline traffic to be back before 2021. Perhaps Asia will do better as most mainland Chinese consumers will not dare travel outside of the country, and will be forced to shop at home rather than abroad. People might embrace the staycation trend. This shift could have a positive sales impact on biking, RVs, golfing, gaming and other segments.

We have read and heard encouraging anecdotes that golf courses are busier than normal. That seems to be in line with data published by the National Golf Foundation on retail square footage and confidence levels. Open United States (US) retail square footage improved significantly over the past month, moving from 39% in early May to 85% at the beginning of June. Golfer sentiment also shifted positively, and golf-related demand should continue to improve as the percentage of golfers believing their financial position will be the same or better after COVID-19 grew from 59% in April to 78% at the end of May.

Here are some of our companies that could do relatively well in this new consumer paradigm:

Husqvarna

The company is a global leader in outdoor power products, including chainsaws, trimmers, lawn mowers, and garden tractors. It is also active in consumer watering products under the Gardena brand. Husqvarna’s portfolio includes products for consumer and professional use. The lawn and garden equipment market should be in a good position to outperform. Husqvarna remains the global leader in robotic lawn mowers and battery-powered products. These product categories should continue to experience high consumer demand.

Royal Unibrew

Royal Unibrew is a multi-beverage company operating in Eastern and Western Europe, several Caribbean countries, America and Africa. Its product portfolio includes branded beers, malt beverages, non-alcoholic beverages and soft drinks. Off-trade demand has been notable, and we expect that the recent reopening of the economy will help boost on-trade sales.

Melia

Melia is one of the leading European hotel groups; it owns and manages more than 326 hotels and resorts in 33 countries, mainly in America and Europe. After more than two months of quarantine, European authorities are now focusing on reopening for tourism. As of July 1st, most Western European countries will be open to tourists from Europe. Melia could see an uptick in demand for its coastal hotels. Summer vacations and warm weather could push Europeans to visit Iberia.

BioGaia

BioGaia is a Swedish-based producer of probiotic supplements for children and adults. BioGaia’s probiotic products help digestive and the immune systems. We expect demand to increase on a growing preference for preventive healthcare, coupled with the growing awareness among customers of the inherent health benefits of probiotics.

Konami

Konami develops and sells consumer video game software and arcade game machines for entertainment facilities. Social distancing measures have contributed to an increase in demand for mobile games.

Have a great week ahead.

The Global Alpha Team

MONTHLY RETURNS (%) AS AT MAY 31, 2020, SERIES F

1M YTD 3M 6M 1YR INCEPTION
Fund 5.6% -13.1% -3.3% -11.3% -3.5% -2.4%
Index 6.6% -8.6% 0.8% -6.9% 1.4% -2.8%

1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at May 31, 2020; e) since inception (March 15, 2018). The index is 100% MSCI EAFE Small Cap NR USD (CAD) and is computed by Ninepoint Partners LP based on publicly available index information.

Ninepoint Partners LP is the investment manager to a number of funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. The indicated rates of return for Series F of the Funds for the period ended May 31, 2020 are based on the historical annual compounded total returns including changes in [unit/share] value and reinvestment of all distributions or dividends and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Funds.

The Fund is generally exposed to the following risks. See the prospectus of the Fund for a description of these risks: ADR risk; Concentration risk; Credit risk; Currency risk; Cybersecurity risk; Emerging markets risk; Foreign investment risk; Inflation risk; Liquidity risk; Market risk; Regulatory risk; Securities lending, repurchase and reverse repurchase transactions risk; Series risk; Small company risk; Specific issuer risk; Sub-adviser risk; Tax risk.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP (“Ninepiont”) and are subject to change without notice. Ninepoint makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint is or will be invested.

Ninepoint and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540

Historical Commentary