Metaverse strategy - During 2022, we have seen a number of developments in all four of the subthemes defining our investment universe
• Market weakness and volatility resurfaced in December 2022 • Our exposure to the ‘Socialising’ theme contributed the most to performance • Within ‘Gaming’, we saw good performance from a number of our video game holdings
What’s happening?
After two consecutive months of positive returns, the market weakness and volatility resurfaced in December, with the MSCI All Country World returning -3.9%[1], ending a challenging year for global equity markets dominated by macroeconomic and geopolitical uncertainties.
The broader market weakness in December was once again driven by concerns around inflation, rising interest rates and recessionary prospects. Despite some signs that the pace of inflation may be moderating, the US Federal Reserve and European Central Bank maintained a hawkish stance, suggesting that more interest increases would be necessary in order to get inflation back under control.
Portfolio positioning and performance
The strategy posted negative performance over the month and underperformed the broader equity index, the MSCI All Country World (all in USD).
During December, our exposure to the ‘Socialising’ theme contributed the most to performance, driven by two of our Emerging Market names. Chinese social media and gaming company Tencent performed well as gaming trends have improved for key video games such as Honour of Kings and Peacekeeper Elite. At the end of the month, Chinese regulator announced the approval of a series of new video games, including 6 new titles from Tencent. It was also encouraging to see that a number of imported games were approved for the first time in 18 months. We also saw good performance from entertainment company Hybe as several artists managed by the label have generated strong album sales.
Within ‘Working’, we continued to see good performance from Penumbra, medical devices company offering treatments for vascular conditions including immersive healthcare. The market remains optimistic regarding the company's plan to launch a series of new products in 2023 for peripheral vascular conditions and strokes. German industrials company Siemens also continued to be resilient, having exposure to several secular growth trends including digitalisation with its Digital Industry division, which enables its customers to optimise their entire value chain, from product design to after-sales services.
Within ‘Gaming’, we saw good performance from a number of our video game holdings, such as Square Enix and Activision Blizzard, driven by key titles Dragon Quest and Call of Duty doing well during the holiday period. This was offset by weakness from gaming engine software company Unity (no specific news) and online gaming platform Roblox (weaker than expected monthly metrics, impacted by adverse exchange rates).
Finally, the ‘Enabling’ theme detracted most to performance over December, particularly impacted by weakness from semiconductor companies. There was no clear catalyst for the softness other than profit taking after the sector had rebounded over the last couple of months.
During December, we sold our position in App monetisation company Applovin, as the monetisation for mobile gaming is facing headwinds and the environment may continue to be challenging. We started a position in media and entertainment company Disney. With a strong Intellectual Property and expertise in storytelling, the company has already demonstrated its interest in the Metaverse with the launch of the Virtual Reality experience Star Wars: Tales from the Galaxy's Edge (available on the Oculus Quest), as well as having its own Virtual Reality and visual effects studio.
Within Enablers, we sold US component supplier that specializes in 3D sensors Lumentum due to soft business trends and competitive concerns. We used the proceeds to purchase Cirrus Logic, supplier of audio chips for a variety of products, including smartphones and Virtual Reality devices.
Outlook
The main themes that have dominated investors' sentiment in 2022 are likely to persist as we enter 2023: concerns around geopolitical issues, higher interest rate prospects, inflation and economic growth. Whilst markets may continue to be volatile, we believe that the long term opportunities driven by the Metaverse remain intact and we are likely to see an increasing number of companies presenting Metaverse related products or services.
During 2022, we have seen a number of developments in all four of the subthemes defining our investment universe: within 'Gaming', we have continued to see increasingly realistic and immersive games being launched, with for example Activision Blizzard's game Call of Duty Modern Warfare 2 which was released in October. It was also encouraging to see that despite having benefitted from the pandemic period, online gaming platform Roblox has grown its daily active users over 2022. Within 'Socialising', the Meta Platform Connect event in October 2022 saw some partnerships being announced alongside the upcoming launch of the high-end Virtual Reality headset Quest Pro, such as Microsoft bringing Microsoft 365 and Microsoft Teams to the device, or a collaboration with Alphabet to propose YouTube VR on the platform. Within 'Working', we are seeing innovations continuing in the Digital Twins technology, as well as Healthcare applications. The CES conference held in early January should provide interesting insights regarding new Metaverse use cases for working applications. Finally within 'Enabling', we are continuing to see new product launches in semiconductors and network equipment which are essential to continue to move the Metaverse opportunity forward. In November 2022, S&P Global released a report forecasting that the AR/VR installed base could grow from 28.5 million as of the end of 2021 to 73.6 million by 2026, implying a compounded annual growth rate of over 20%, across consumer and business settings[2].
A few months ago, the question on the hype around the Metaverse theme was at the forefront of investors' minds but the challenging market conditions over the past year have led to valuations within the universe becoming increasingly attractive especially given the long-term growth potential of many of the companies in the group. Our investment philosophy within the strategy is to have the vast majority of the portfolio exposed to profitable companies that generate healthy amounts of cash and present strong balance sheets whilst staying well positioned to benefit from the trends associated with the Metaverse theme around the four subthemes of Gaming, Socialising, Working and Enabling. In February 2022, technological consulting firm Gartner published a research article forecasting that by 2026 a quarter of the population will spend at least one hour per day in the Metaverse. We believe we are the early stages of a long term trend which spans opportunities in almost every aspects of our lives and expect innovation to continue at a rapid pace.
[1] Source: Bloomberg in USD as of 31/12/22
[2] Source: S&P Global Market Intelligence, November 2022
disclaimer Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly. Past performance is not a guide to current or future performance, and any performance or return data displayed does not take into account commissions and costs incurred when issuing or redeeming units. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. Exchange-rate fluctuations may also affect the value of their investment. Due to this and the initial charge that is usually made, an investment is not usually suitable as a short term holding. This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. The strategies discussed in this document may not be available in your jurisdiction. Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. Please note that the management company reserves the right, at any time, to no longer market the product(s) mentioned in this communication in an European Union country by notification to its authority of supervision in accordance with European passport rules. In the event of dissatisfaction with the products or services, you have the right to make a complaint either with the marketer or directly with the management company (more information on our complaints policy available in English here). You also have the right to take legal or extra-judicial action at any time if you reside in one of the countries of the European Union. The European online dispute resolution platform allows you to enter a complaint form (by clicking here) and informs you, depending on your jurisdiction, about your means of redress (by clicking here). Issued in the U.K. by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales, No: 01431068. Registered Office: 22 Bishopsgate, London, EC2N 4BQ. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. In Hong Kong, this document is issued by AXA Investment Managers Asia Limited (SFC License No. AAP809), which is authorized and regulated by Securities and Futures Commission. This document is to be used only by persons defined as “professional investor” under Part 1 of Schedule 1 to the Securities and Futures Ordinance (SFO) and other regulations, rules, guidelines or circulars which reference “professional investor” as defined under Part 1 of Schedule 1 to the SFO. This document must not be relied upon by retail investors. Circulation must be restricted accordingly. In Singapore, this document is issued by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) and is intended for the use of Institutional Investors only as defined in Section 4A of the Securities and Futures Act (Cap. 289) and must not be relied upon by retail investors. Circulation must be restricted accordingly For Japanese clients: AXA Investment Managers Japan Ltd., whose registered office and principal place of business is at NBF Platinum Tower 14F 1-17-3 Shirokane, Minato-ku, Tokyo 108-0072, Japan, which is registered with the Financial Services Agency of Japan under the number KANTOZAIMUKYOKUCHO (KINSHO) 16, and is a member of Japan Securities Dealers Association, Type II Financial Instrument Firms Association, Investment Trust Association of Japan and Japan Investment Advisors Association to carry out the regulated activity of Financial Instrument Business under the Financial Instrument Exchange Law of Japan. In Japan, none of the funds mentioned in this document are registered under the Financial Instrument Exchange Law of Japan or Act on Investment Trusts and Investment Corporations. This document is purely for the information purpose for use by Qualified Institutional Investors defined by the Financial Instrument Exchange Law of Japan. In Taiwan, this document is issued by AXA Investment Managers Asia Limited (SFC License No. AAP809), which is authorized and regulated by Securities and Futures Commission. This document and the information contained herein are intended for the use of professional or institutional investors and should not be relied upon by retail investors. They have been prepared and issued for private informational and educational purposes only at the sole request of the specified recipients, and not intended for general circulation. They are strictly confidential, and must not be reproduced, circulated, distributed, redistributed or otherwise used, in whole or in part, in any way without the prior written consent of AXA IM Asia. They are not intended for distribution to any persons or in any jurisdictions for which it is prohibited. If any fund is highlighted in this communication (the “Fund”), its offering document or prospectus contains important information on selling restrictions and risk factors, you should read them carefully before entering into any transaction. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction. AXA IM Asia does not intend to offer any Fund in any country where such offering is prohibited. The offer, distribution, sale or re-sale of fund units/shares in Taiwan requires approval from and/or registration with Taiwanese regulatory authorities. To the extent that any units/shares of the Funds are not so licensed or registered, such units/shares are made available in Taiwan on a private placement basis only to banks, bills houses, trust enterprises, financial holding companies and other qualified entities or institutions (collectively, “Qualified Institutions”) and other entities and individuals meeting specific criteria (“Other Qualified Investors”) pursuant to the private placement provisions of the Rules Governing Offshore Funds. No other offer or sale of such units/shares in Taiwan is permitted. Taiwanese purchasers of such units/shares may not sell or otherwise dispose of their holdings except by redemption, transfer to a Qualified Institution or Other Qualified Investor, transfer by operation of law or other means approved by the Taiwan Financial Supervisory Commission. In Korea, AXA Investment Managers Asia (Singapore) Ltd is a registered Cross Border Investment Advisor/Discretionary Investment Management Company under the Financial Investment Services and Capital Markets Act (the “Act”). The activities referenced under the Act are 5-2-2 Investment Advisory Business and 6-2-2 Discretionary Investment Management Business, respectively. Its financial services are available in Korea only to Professional Investors within the meaning of Article 10 of Enforcement Decree of the Financial Investment Services and Capital Markets Act. To the extent that any fund is mentioned in this document, neither the fund nor AXA IM Asia is making any representation with respect to the eligibility of any recipients of this document to acquire the units/shares in the fund under the laws of Korea, including but without limitation the Foreign Exchange Transaction Act and Regulations thereunder. The units/shares have not been registered under the Financial Investment Services and Capital Markets Act of Korea, and none of the units/shares may be offered, sold or delivered, or offered or sold to any person for re-offering or resale, directly or indirectly, in Korea or to any resident of Korea except pursuant to applicable laws and regulations of Korea. For Malaysian investors: As the recognition by the Malaysian Securities Commission pursuant to Section 212 of the Malaysian Capital Markets and Services Act 2007 has not been / will not be obtained nor will this document be lodged or registered with the Malaysian Securities Commission, the shares referred to hereunder (if any) are not being and will not be deemed to be issued, made available, offered for subscription or purchase in Malaysia and neither this document nor any other document or other material in connection therewith should be distributed, caused to be distributed or circulated in Malaysia. For Thailand investors: Nothing in this document shall constitute in any manner whatsoever a proposal to make available, offer for subscription or purchase or to issue an invitation to purchase or subscribe for any securities in Thailand or a proposal to implement any of the foregoing in Thailand nor has this document been approved by or registered with the Securities and Exchange Commission of Thailand (“SEC”). No person receiving a copy of this document may treat the same as constituting an invitation or offer to him in Thailand and such person shall not distribute or make available this document in Thailand. The issuer of this document shall not be liable in any manner whatsoever in the event this document is distributed or made available to any person in Thailand receiving a copy of this document. Since no application for approval has been or will be made to the SEC for the offering of the securities, or for the registration of this document, the securities shall not be offered for subscription or purchased or made available, whether directly or indirectly, in Thailand. It is the sole responsibility of recipients wishing to take any action upon this document to satisfy themselves as to the full observance of the laws of Thailand, to comply with all relevant government and regulatory approvals, and to comply with all applicable laws, including but not limited to exchange control laws. For Investors in People’s Republic of China (PRC): This document does not constitute a public offer of the product., whether by sale or subscription in the PRC. The product is not being offered or sold directly or indirectly in the PRC to or for the benefit of, legal or natural persons of the PRC. Further, no legal or natural persons of the PRC may directly or indirectly purchase any of the product or any beneficial interest herein without obtaining all prior PRC’s governmental approvals that are required, whether statutorily or otherwise. Persons who come into possession of this document are required by the issuer and its representatives to observe these restrictions. MSCI: Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.