Magellan Global Quarterly Update

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[00:01:01] What turned out to be the things that mattered and didn't matter in the markets this past year?

2023 was marked by a fascinating economic landscape, with global equity prices soaring over 20%, primarily concentrated in a select group of companies. Notably, the companies that performed well shared characteristics of being high-quality and possessing resilient business models, factors that typically shine during periods of higher-than-average interest rates. Durable companies with a structural growth tailwind, particularly in the realm of artificial intelligence, stood out, differing significantly from the dotcom era where the focus was on acquiring new customers. The so-called "Magnificent Seven" major companies were distinguished not only by their tech prowess but also by their high quality and structural growth. Despite initial concerns about a hard landing, consensus shifted, recognising the Federal Reserve's efforts to counterbalance extensive fiscal stimulus.

[00:03:40] Insights on how investment decisions are considered in the portfolio.

Our overarching goal is to achieve 9% net compound returns over the long term while minimising the risk of permanent capital loss. This objective guides our daily decision-making process. We focus on a narrowed universe of high-quality companies to mitigate risk and ensure competitive strength, emphasising well-managed firms capable of executing effectively. Our macro-level analysis is important, considering economic, geopolitical, and political factors, along with the prevailing interest rate environment, as these factors will influence how companies invest and manage for the future. Last year, interest rates played a role in shaping our portfolio, and we recognise ongoing global trends like decarbonisation, digitisation, and de-globalisation, which have support of government policy around the world, and so align our strategy with companies well-positioned to leverage these shifts. The economic cycle brings fluctuations to profits and share prices, especially for companies that are leveraged to cycles, and so we typical own less of these cyclical exposures given we maintain a strategy with less-than-market risk. This helps us deliver the absolute compounding objective through time with less risk.

[00:07:14] Outlook on the continued value of long-term portfolio holdings

We maintain a long-term investment perspective. Looking at Microsoft as an example, despite its challenges in 2022, where cloud optimisation and slowing earnings growth impacted its performance, looking ahead, we believe Microsoft is exceptionally well-positioned, particularly in the shift towards generative AI, boasting a pre-eminent position across enterprises with widespread product usage and a network effect. While the timing of the uplift of profit impact from commercialisation of AI is uncertain—whether in 2024 or 2025—we are highly confident in the significant opportunity that lies ahead for Microsoft. Sometimes we get asked about if stocks are still worth owning when they reach all-time highs, but companies that are growing strongly and delivering good results will keep hitting all time highs and we must assess if the valuation is stretched at these times. Our commitment is to businesses with strong earnings outlooks, ensuring confidence in their ability to generate high returns and deliver value to shareholders, ultimately guiding our portfolio decisions.

[00:10:03] The outlook for 2024

Last year the focus was primarily on inflation and interest rates, but with inflation now returning to desired levels, attention shifts towards the job market and unemployment rates. The strength of the job market has been a key factor in the resilience of the global and particularly the American economy amid higher interest rates. A potential increase in unemployment could result from various factors, including lagged effects of past interest rate hikes or unforeseen events. Investors should closely monitor these dynamics as changes in the unemployment rate can influence future interest rate decisions, or potentially impact equity market returns. In response to if the US election will matter, elections always matter but it is important to understand why it matters. Potential changes in the supply chain due to trade policies, particularly with China, and labour market dynamics, such as immigration restrictions, could lead to supply shocks that may impact the global economy and investment markets. On the demand side, a clean sweep by one party in the election could lead to government stimulus and economic strength, influencing market trends, though our assessment at this early stage of the electoral cycle is that a clean sweep by either side is unlikely.

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