Patricia Perez, our new Distribution Executive in Perth, joined co-founder and portfolio manager Jonathan Ramsay for our "3 in 10" session to provide insights on the market volatility and how our portfolios are positioned to factor it. 

‍How do we assess the current economic climate and what do we see for the year ahead? 

While no one has a crystal ball, we are closely monitoring a range of macroeconomic scenarios influenced by market volatility, inflationary pressures, and geopolitical uncertainties, especially leading up to the U.S. election. Our proprietary valuation dashboard aids in assessing asset class performance, seeking long-term opportunities, and aligning valuations with anticipated market developments.

The four potential economic scenarios we are monitoring are:

1. AI/Energy Driven Productivity Boom: A bullish case where ROI from AI and energy transitions boost corporate earnings by year-end.

2. Muddle Through: A balance of fiscal stimuli potentially pushing yields higher, offsetting other economic pressures.

3. Recessionary Hard Landing: A potential debt crisis triggered by stresses in private credit markets.

4. Stagflationary Outlook: n which easing by the U.S. administration and Federal Reserve ahead of the election supports markets but sows the seeds for inflation to resurge in 2025

‍

What does this mean when positioning portfolios? 

Despite the uncertainty, it’s "not all doom and gloom", with some potential positive catalysts on the horizon. In positioning portfolios, we have observed that sectors perceived as higher risk, like small caps and emerging markets, have shown less volatility compared to more established markets like the Nasdaq. This counterintuitive stability is partly due to these sectors being undervalued, offering potentially higher long-term returns.

‍

Why has the small cap strategy performed well?

The strong performance of the small cap strategy is as a result of both the underlying favourable thematic positioning and strong active management by Fund Manager Langdon Equity Partners. Langdon's portfolio is well-aligned with our long term approach, being underweight the U.S. and overweight Europe and the UK. Additionally, Langdon's focus on companies with positive cash flows, low debt levels, and exposure to "mini-recessions" in certain industries post-COVID has paid off as earnings have surprised to the upside. While maintaining a valuation discipline, Langdon's portfolio offers compelling long-term growth at a reasonable normalised P/E multiple.  

Get more insights about Langdon’s approach to Global Small Caps from our recent conversation with Founder and Lead Investor Greg Dean. 

‍

Adopting a scenario-based planning approach is fundamental for navigating complex market conditions. This methodology provides a structured framework to manage portfolios effectively, balancing stability and identifying growth opportunities amid economic volatility.