One of our favourite quotes by Charlie Munger is “Micro is what we do, macro is what we put up with”. It has never felt more relevant than in 2024, a year of elections. Like in investing, in politics fundamentals matter. James Carville, Bill Clinton’s campaign manager famously said in 1992, “It’s the economy, stupid,” but this year, it’s more accurate to say, “It’s the inflation, stupid.” Real and perceived concerns about the economy, and the reality of the high inflation and lagging incomes over the past two year, are among the key reasons for the election outcomes in the UK, France, Germany and most important of all, the US.
Fundamentals drive both financial markets and politics. They also impose necessary constraints on both foreign and domestic policy, including trade and regulatory frameworks. That is why they are also our greatest source of confidence as we look ahead. Donald Trump and his incoming administration will have opportunities to implement the pro-growth initiatives advocated during the campaign. These measures will require a functioning economy, free trade, a stable legal and regulatory framework, and above all, healthy financial markets to create a more prosperous nation.
One of our own convictions is that ‘everything may be OK’. The US economy remains resilient. Employment is strong, inflation is easing and interest rates are beginning to decline. We believe we are at the peak of the consumer squeeze, with recovery on the horizon. Just as the pandemic’s disruptions and the sudden normalization of interest rates had a lagged negative impact on inflation, the current recovery will bring a lagged positive effect.
At the core of our strategy is a focus on quality – quality companies with strong fundamentals and attractive valuations. That’s why we have used recent opportunities to reduce positions in some technology and industrial companies, which have performed exceptionally well, for risk management and valuation reasons. We have reallocated capital to consumer stocks that have sold off, increasing our stakes in outstanding global companies now trading at discounted prices. In 2022 markets believed that digital advertising was over and in 2024 it’s that people will no longer buy branded food, coffee or cosmetics, feed their pets, buy handbags or have a glass of whiskey. Whether it’s stocks or socks, as Charlie’s business partner Warren Buffett likes to say, we love buying quality when it’s on sale.
Quality will matter even more in the period ahead. With resilient growth accompanied by sustained inflation, we believe quality companies will have the edge. They benefit from innovation, pricing power, scale, strong cash flow, and balance sheets that enable reinvestment and strategic acquisitions. These attributes have underpinned our portfolio’s strong returns over the last decade, despite significant challenges, and they will continue to drive resilience and value creation in the long term.
