January saw a remarkable and abrupt broadening in share price performance after two years of historically high concentration. There have been previous episodes of market broadening in the last year, so this is possibly just another pullback in an ongoing trend. On the other hand, consensus analyst forecasts and company guidance point towards a more equitable distribution of earnings growth in the year ahead. The narrowing of the last two years was due in part to a remarkable earnings recession which affected most developed market indices outside a small cohort of large cap US growth companies. Excluding them, S&P 500 earnings and hence MSCI World earnings declined in aggregate. Our portfolio navigated the same period with high single digit sales and earnings growth but was derated in line with the ‘S&P 494’ and the ex-US indices.

On a micro scale, we see plenty of reasons to remain cheerful. Importantly, our constituent companies have continued to prioritise investment and innovation through a turbulent five years and have in aggregate been rewarded for it by improved market share, sustained revenue growth, and continued attractive cash returns on invested capital. As long as they are pursuing this ‘true north’ objective, we remain confident that share prices will follow. While tariffs are ‘top of mind’, the portfolio’s high embedded pricing power should soften their impact and leave it better placed than the average listed company. The first crop of earnings results for the calendar 2024 year are in and speak to continued business franchise strength, both for steady eddies like Mastercard, Broadridge, and Microsoft, and for companies working their way through cyclical troughs like Nintendo, Diageo, and Johnson & Johnson. Nintendo is clearing the decks for the anticipated Switch 2 launch and continuing to plough money into R&D. Diageo has navigated a unique post-Covid cycle with increased market share and sustained brand investment. Johnson & Johnson has improved its medical device portfolio and enhanced its pharmaceutical pipeline while preparing to lose exclusivity on its blockbuster drug Stelara.

We would be remiss in leaving out DeepSeek, the other big story this month. While it is far too early to make firm prognostications, at the margin we think that it points the way to greater capital efficiency in the generative AI market. We think the news came too late to affect the calendar 2025 guidance for most major companies in the industry, but over time we think that as with many technologies, innovations that lower cost will be positive both for adoption and for the companies which own the content which can be enhanced by this efficient computing power. We remain excited for the year ahead and grateful for the continued support and trust of our investors.