Insight - Keep Calm and Carry On
KEEP CALM and CARRY ON was a poster produced by the British government in preparation for World War II. It was intended to help raise morale by reminding people to focus on the task at hand, ignore the noise and perceived impact of what could happen. This is most appropriate for investors in this time with unpredictable leadership in the White House.
During the time of the greatest uncertainty, at the start of the Great Financial Crisis, Howard Marks wrote his 2008 memo titled, Nobody Knows, which emphasised that nobody knows the future and his conclusions were as follows:
“We can't confidently predict the end of the world,
We'd have no idea what to do if we knew the world would end,
The things we do to gird for the end of the world would be disastrous if it didn't end, and
Most of the time the world doesn't end. “
The increased uncertainty of what will happen to global financial markets, following the US inspired trade war, is creating extreme volatility that has a direct impact on ruling share prices resulting in wild swings of 15% plus over the last month. As long-term investors it pays to keep our eyes on the horizon, stick to our knitting by finding the best companies in the world that will continue to deliver growing free cash flow for many years to come, with management that will react and adapt to new realities in the best interest of shareholders.
Quality does not change; it adapts and find ways to deal with new realities.
As the future is unpredictable, in reviewing our portfolio companies, I focused on identifying constants that will remain after changes in policy and global trade dynamics:
The global population is expected to maintain its current trajectory, with no significant changes projected over the next decade, barring global nuclear conflicts. Consumers will continue to consume products and services.
Technology will continue to develop and bring greater efficiency to processes.
The prevalence of diabetes and obesity is projected to rise, making treatment increasingly crucial in the coming years. (NVO)
Trading activity on the Hong Kong Stock Exchange will persist and increase over time. (388 HKEC)
Interactive media and online value-added services will continue to be monetised, with sustained growth expected for many years. (700: Tencent)
Social media usage will remain widespread, with functionality and profitability expanding for major service providers. (META, 700)
Companies will continue to advertise its products and services. (META, AMZN, 700)
The automotive replacement parts and maintenance industry is projected to remain strong and grow for the foreseeable future. (AZO)
Growth in online orders and home deliveries of various goods is well-positioned to continue. (AMZN, PDD)
Cloud computing has seen rapid growth, and many companies have yet to migrate their data centres to the cloud, suggesting continued robust expansion. (MSFT, AMZN)
Artificial intelligence is at an early stage and is expected to grow significantly, with cloud computing leaders poised to be the first to monetize AI advancements. (MSFT, AMZN)
The Polish economy is consistently outperforming the EU, with retailing of daily essentials forecasted to expand further, especially for well run businesses. (DNP)
The insurance market in the US is growing, with niche and focused service providers likely to continue expanding, subject to prudent underwriting practices. (KNSL)
Online banking and value added services in South America and Mexico is in its infancy and will likely experience substantial growth in the coming years. (NU)
In the context of pervasive social media use, the beauty industry is expected to maintain its dominant position in discretionary spending. (OR, MC)
Cash usage in daily transactions is declining across most regions, with online and card transactions projected to continue its growth trajectory. (V)
Businesses worldwide face similar challenges. What distinguishes top performers from laggards? Strong balance sheets, consistent cash flow, pricing power, competent capital allocation, and adaptability to new realities.
Portfolio construction remains key in uncertain times, and a well-diversified, concentrated portfolio, of quality companies should continue to outperform the overall market over the long term. Well-diversified and concentrated appears to be an oxymoron in terms of portfolio construction, however if the industry, geographical split and end users are differentiated, diversification in a small number of businesses can be achieved.
The long-term consequences of recent actions from the White House are impossible to predict, but brand "USA" has changed. Certainty and trust are fundamental to all assets; when these are compromised, confidence in their value diminishes. In contrast, China's measured and steady response, with their eternal focus on the long term, may contribute to the USD's potential decline as the world's reserve currency.
The trade war and certain other actions by the White House, are like shooting yourself in the foot, not dissimilar to the UK enacting Brexit or the actions of our local ANC government over the last 15 years. These actions arise from discomfort with your situation and reacting impulsively without considering the broader consequences. If the US continues to shoot themselves in the foot, they may end up like the ANC, without a leg to stand on. I trust sanity will prevail!
Keep Calm and carry on!
Footnote: Although 2.45 million copies of the Keep Calm poster were printed, and the Blitz did in fact take place, the poster was only rarely publicly displayed and was little known until a copy was rediscovered in 2000 at Barter Books, a bookshop in Alnwick. - Wikipedia