Lessons for market drawdowns

Hear how our Global Equities team is approaching this period of stock market volatility and the distinct areas of opportunity they’re finding around the world.

It’s hard to believe it’s been a little more than one week since President Trump announced his ‘Liberation Day’ tariff plans. We wanted to update you on how we’ve approached this tumultuous period for markets and emphasise some lessons learnt from the previous drawdowns we’ve experienced.

Two key things to understand about stock market volatility

Firstly, whether they’re driven by economics, geopolitics or valuations, stock markets are volatile, and they experience falls in almost every calendar year.

Past performance is not a guide to future returns

It’s not just the S&P 500 — all markets experience drawdowns. But despite all of these drawdowns, as long as investors remained invested, they made very attractive long-term returns; from 1/1/1980 to 04/07/2025 the MSCI World Index has returned about 9% p.a. or 4,851%!¹

The key is “Time in the market, not timing the market”. Often the best days follow some of the worst volatility, so when investors try to avoid the worst days, they tend to miss some of the best days too. And missing just some of the market’s best days can have a big impact on longer-term returns, as evidenced by the chart below:

Secondly, these periods provide stock pickers with the opportunity to add significant value. Selling is often indiscriminate, and we try to take advantage of this selling while being mindful of the risks and uncertainty of the macro environment. In simple terms, opportunity and uncertainty go hand in hand for active managers.

Three ways we’ve managed recent stock volatility

Our approach during the recent tariff-related volatility can be distilled into three key points:

1. Stay focused on the long term. We can draw on our experience over the last 20 years, through the Global Financial Crisis, European sovereign debt crisis, Covid, and more. This experience helps us stay focused on the best risk/return opportunities that are presented at a stock level.
2. Re-test the thesis. We aim to buy good companies that have strong balance sheets and are run by management teams we trust to take advantage of situations like this one. If any of these critical elements are no longer true, then we may recycle capital. The kind of questions we are asking ourselves are as follows: Has their market position changed? Has their industry changed? What can management do to take advantage of new opportunities?
3. Concentrate our capital in the best risk/reward opportunities. It isn’t often in your career that almost every business in the market goes on sale. There are many businesses on our shopping list that we have been waiting to buy, and many great businesses are on sale. This is potentially a very exciting time for future returns. Our job is to build the best risk/reward portfolio of these companies that we can.

Three areas of opportunity for our portfolios

We have found three distinct areas of opportunity thus far:

1. Companies that have been made stronger by tariffs. US tariffs on China have created a sudden demand shock for Chinese factories. Companies like 3i have historically done well during periods like these because they could take advantage of this vacuum and buy great products at bargain prices and could pass this benefit onto their consumers.
2. Companies in markets that have panicked about the impact of tariffs. Canadian Pacific services Canada to Mexico by rail. Their shares have seen a 27% drawdown as the market has panicked about the effect of tariffs on their business model. During Trump’s first presidency, he enacted tariffs on these counterparties — but Canadian Pacific still grew earnings by 14.5% p.a., and its shares returned 25% p.a. vs 14.3% for the MSCI World.
3. Companies that have been caught up in the sell-off despite no tariff exposure. Recordati manufactures and distributes niche pharmaceuticals, and 17% of their sales are from the US. They have grown EPS at c.10% p.a. for a decade and pay a 3% dividend yield. The shares have declined 22.5% from peak despite being one of the companies with the least risk to earnings we can think of. They now sell for their lowest P/E ratio in a decade.²

Learning from the past while managing for the future

We appreciate that some of the headlines are scary for investors, and there is a great deal of uncertainty regarding the economic and political outcomes of the current situation. However, our experience through 2008/09, the European debt crisis, Covid, and the 2022 tech wreck have taught us that the equity market has always acted as a discounting mechanism, with future information quickly assimilated into stock prices. As stock pickers, we believe we are fortunate to be able to take advantage of these situations and make decisions today that will materially benefit the long-run returns for investors.

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Stephen Annes is a co-fund manager of the Global Equity Income & Growth strategy.

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