Every year brings its share of surprises, whether economic, political, or technological. However, not all surprises are bad and not all volatility is negative. At the end of last year, we witnessed the unexpected fall of the regime in Syria and, just this week, the announcement of a ceasefire in Gaza. While great challenges remain, these developments show the potential for positive change even in periods of great uncertainty.
Our favourite Chinese restaurant in London, Min Jiang, is on the top floor of the Royal Garden Hotel next to Kensington Palace, where a larger-than-life sculpture of Khoo Teck Puat stands in homage to the Malaysian investor. The inscription states that he owned banks and real estate in Singapore, and that “with great foresight” he bought London properties including the Royal Garden. It has become our tradition after dim sum lunch to rub the glasses of his sculpture, hoping to impart a measure of his foresight for our own investments.
As we enter 2025, we are reminded that alongside challenges lie significant opportunities for those prepared to act with foresight and discipline. After two years of strong stock market performance, we are at a juncture where active investment management is poised to demonstrate its value. Donald Trump’s inauguration is next week and we will soon see the reality of his new policy initiatives after two months of powerful rhetoric from various sources. At the same time, the US economy continues to be strong and markets are trying to adapt to the possibility that interest rates will be higher for longer. As we said last year, unlike in the fairy tale, in economics Goldilocks is always too hot or too cold, it is never just right.
Most equity markets are now more fully valued with many companies trading at prices that cannot be justified by high expectations for future performance and leave limited margin for error. Broad market momentum is likely to give way to a greater focus on fundamentals. For long-term investors, this shift highlights the importance of rigorous analysis and disciplined stock selection.
Quality is the key differentiator. Businesses with robust fundamentals, characterized by strong cash flows, sustainable growth, and resilient balance sheets, offer superior long-term prospects, even when acquired at higher valuations. The enduring advantages of these quality companies cannot be overstated. They benefit from innovation, pricing power, and operational scale, attributes that enable them to navigate economic uncertainties while maintaining competitive advantages. Moreover, their ability to reinvest in growth and pursue strategic acquisitions allows them to achieve continued value creation over time. These qualities have underpinned our portfolio’s robust performance over the past decade, despite an ever-changing market landscape.
Valuation matters as well. Equity market concentration is an area of increasing concern, as the dominance of a small number of large-cap stocks has wielded disproportionate influence within the MSCI World and the S&P 500 and many of them are overvalued. Some of our stocks, like Amazon, Alphabet, Meta and Nvidia are among the Magnificent Seven and are among our best performers. We have listed them in the order we bought them starting in 2012. It is time to move on from the Magnificent Seven grouping because these stocks are not all alike in terms of their business models, management teams, sustainable competitive positions, their opportunities for growth and reinvestment, and their cash generation and returns. Our companies have demonstrated remarkable innovation and growth and while their share prices have increased, we think they are still at attractive valuations.