Q2 2025 Manager Update
What’s new in the portfolio and analysis of market events and ongoing trade tariff threats.
Ferrari, an iconic Italian sports car manufacturer, has a strong brand and pricing power, attracting investments since 2019.
Market Review
Market gains
Global equities went on to post further gains in the last quarter of 2024 led by US technology stocks albeit with increased volatility. The victory of Donald Trump and his Republican party’s majority in both chambers of Congress fuelled a rally in US equities, as market was optimistic that their expansionary fiscal and nationalist trade policies will benefit the domestic economy, which has stayed robust.
Whereas European equities underperformed, the region was seen to be victim of Trump’s proposed trade policies, weak domestic growth and exposure to China added to the negative sentiment.
DeepSeek surprise
It was all change in January with a shift in both regional and sector leadership. The emergence of DeepSeek, a Chinese contender in the arms race of artificial intelligence, took the market by surprise. Being able to produce large language models at lower cost than US peers like ChatGPT, led investors to take profit from US technology names.
As US equities retreated Europe outperformed other regions against a benign backdrop of more attractive valuation, better-than-expected economic data and the prospect of further rate cuts from the European Central Bank (ECB).
Inflation and the Trump Tariffs
Inflation has remained sticky during the period. Although the US Federal Reserve, lowered rates by another 25 basis points in December, US inflation stayed stubbornly above the 2% targeted by the Fed. Inflation in the US has been on the rise the last few months, and Trump’s blanket tariffs on global trade partners could stoke further inflationary pressures. The European Central Bank, however, remains on a steady path of rate cuts having lowered its rates by 50 basis points over the quarter and signalling a clear path ahead in the face of lacklustre economic growth.
Portfolio Update
As way of portfolio update, over the period we have made a number of changes to the portfolio, adding Chipotle Mexican Grill, Deckers Outdoor, Meta and Constellation Software.
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Chipotle Mexican Grill is a Mexican fast casual restaurant that serves fresh high-quality meals. A top 10 player in the US, with strong returns and growth prospects, it benefits from favourable demographics and strong brand perception.
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Deckers is the owner of sport and lifestyle brands such as Hoka and UGG where we see strong profits and growth potential.
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Meta, owner of Facebook and Instagram, is a dominance force in social media in the US and beyond. It has strong return and growth outlook and has become a more apparent beneficiary of artificial intelligence over the last year. The latter we believe should drive its share of advertising and enhance its user experience, leading to accelerated growth.
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Constellation Software is a Canadian based conglomerate that acquires and manages vertical market software businesses, its successful track record of efficient capital allocation has driven strong growth and returns.
On the other side of the portfolio, we existed Pernod Ricard, largely due to tariff concerns. We also sold Estee Lauder and Croda, where our conviction has lowered, to fund the purchase of higher conviction stocks in the consumer space.
Outlook & Opportunities
Resilient growth in US despite tariffs
The clean sweep for Donald Trump and Republicans in the US presidential election, in our view, will have the biggest influence on global markets in 2025. Proposed blanket tariffs on global trade partners could stoke inflationary pressures, leading to a more hawkish response from the Fed, and an increase in geopolitical tensions. However, we expect resilient growth in the US to continue, equally, cuts in corporate taxes could boost earnings.
China and Europe are encouraging
In China we are encouraged by the recent string of policy initiatives from the government to support its slowing economy. These could lead to continued recovery in the domestic economy and in turn, support the global economic cycle. Europe, on the other hand, is likely to remain in a low growth environment. But the ECB is likely to remain on the path of rate cuts, which is supportive of European equities.
European and Asian equities still offer more valuation support relative to history and relative to other developed market equities, although both regions also carry a higher geopolitical risk, and are more cyclically sensitive
After a volatile 2024, we believe earnings growth could be slightly more supportive across regions in 2025 at the Global and US levels. However, we believe consensus forecast remains overly optimistic. Therefore, it is important to focus on earnings momentum risks, by finding companies that either resist downwards revisions, or can deliver positive surprises.
We believe consensus forecast remains overly optimistic. Therefore, it is important to focus on earnings momentum risks, by finding companies that either resist downwards revisions, or can deliver positive surprises.”
Against this uncertain backdrop we think that we will see more disparity between companies that can protect their margins and those that will struggle because of stickier inflation. That is why it is so important to focus on firms with pricing power, and exposure to structural growth drivers; they are the ones which should be able to withstand this backdrop and succeed in the long term in our view.
Our conclusions: long-term growth trends driving growth
As long-term investors, we continue to see the most attractive growth opportunities being driven by artificial intelligence, the aging population, and the energy transition. Although the energy transition theme could be facing more uncertainty under the Trump administration, corporates should continue to focus on reducing their carbon footprint.
An ageing population should remain an important focal point across governments and the private sector, while artificial intelligence is still undervalued by the market in our view, both in terms of magnitude of the addressable market, and in terms of speed at which the opportunity could be harnessed. It has the potential to unleash a long period of major boost to corporate productivity across sectors and will be trigger for acceleration in innovation and a rise in disruption risk at the same time.
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