Equity strategies in uncertain times

Q: Can you recap what’s happened since the US election?

A. When Trump was elected in 2024, the stock markets greeted that news with a degree of euphoria. We saw very strong performance, particularly for the US stock market. And very arguably, extreme multiple expansion in Q4 of 2024. We were somewhat cautious at that point. We felt that investor expectations were extended. As a result, we did dial down our exposure to the US, and we got somewhat more defensive in the portfolio, reflecting what we felt was just elevated investor expectations. I think we, and everyone else, have been surprised by the extent of the pivot in policy. While tariffs were always going to be part of the Trump presidency playbook, their use has been far more widespread and aggressive in terms of their scale than I think we, or anyone, else expected. So, what was quite a euphoric environment, and multiples being somewhat extended, has turned into a much more hostile market environment in Q1 2025. Multiples have compressed, and clearly now we have potentially material earnings risks to contend with. So, the environment has pivoted. The good news is that valuations have gone from arguably rich, to somewhat more attractive. So, in this environment, we’re finding more opportunities than we saw at the back end of 2024.

Q: How are you managing geopolitical risks?

The first thing that I always say is predicting the future is a futile thing to do. And no better example of that is the fact that we've seen euphoria turn into despair in three short months. Our approach is to make sure we avoid making bold predictions of the future, and to construct a portfolio that is well diversified that ought to be able to weather the current storm, but also ultimately benefit when the environment improves once again. The way we do that is we make sure that we have a diverse group of businesses in different industries with different country exposures and crucially, businesses with strong balance sheets run by talented and agile management teams that have the capacity to adapt those businesses and pivot where necessary. This was the playbook in the pandemic. Certainly, there's going to be a few companies that could be at risk of permanent impairment given the way the policymaking environment is evolving. But by and large, we're confident that the vast majority of the companies we’re in will be able to adjust their supply chains and continue to serve their customers. We're also doublechecking our work on the businesses we own, while at the same time remaining open-minded to the fact that in a market that's fallen fairly extensively, there are opportunities to buy good businesses on sale.

Q. What about artificial intelligence (AI) and the Magnificent 7?

The Mag Seven, as always, needs to be taken on their own individual merits. I think with Apple and Tesla, the more important question is not so much AI, but more to do with the fact that they both earn a reasonable proportion of their earnings from China. So, the question is, “Is business going to be permanently impaired given the state of the US-China relations as it stands today?” It’s an ongoing question. Obviously with Apple, there was also that risk that tariffs would cause it to have to significantly push prices up for iPhones in their domestic market. But they've obviously been given a reprieve on that after the announcement that tariffs were paused for 90 days. So that's probably the more important issue for Apple and Tesla.

For Google, there's certainly a portion of their business that’s exposed to advertisers from China who export into the US market. So, they’ll certainly see some impact from a slowdown there. In terms of the rest of the Mag Seven, it really depends, I think, on the outlook for the cloud and AI. More broadly, our view would be cloud computing platforms like Microsoft, Amazon, and Google Cloud, would see a slowdown in revenue growth for no other reason than that the economic environment is slowing. Those businesses are very sensitive, in terms of the number of workloads run, to how their customers’ businesses are ultimately performing. So, there's going to be some sensitivity on the cloud growth, which we'll see in the next couple of weeks when they report their Q1 numbers.

The knock on effect for that will be to Nvidia and the rest of the semiconductor supply chain. If those cloud businesses do see a revenue slowdown, it’s likely that Amazon, Microsoft, and others will temper their capex growth. And so that’ll have a knock on effect to the semiconductor supply chain. So, we're trying to calibrate those risks in terms of how we're thinking about the position sizes for each of those businesses.

Q. What’s your outlook?

The outlook is very uncertain at the moment. It's one of those environments that, to me at least, doesn't feel like there's a big structural overhang. Yes, we do have a situation where governments probably have a little too much debt. Certainly, deficits in countries like the US and France have gotten to a point where they do need to be reined in. So that's clearly a headwind. But as far as policy goes, it’s something that’s imminently resolvable. So, my longer term judgment would be that it’s in China's and America's interests to come to the table to find some kind of pragmatic center ground. If we get there, I think the environment, the outlook, could change very, very quickly.

I think the risk of being too conservatively positioned right now is almost as high as the risk of being too aggressively positioned. So, our starting point is one of balance.