Bob Desmond: We are close to euphoria - here's what that means for investors

As a high-conviction portfolio manager. How important is the macro to your process?

The second derivative is also really difficult because you have to make sure that that information is not in the market. So, we pay no attention to macro. What we pay a lot of attention to is the quality of what we own and the competitive advantage. Also, we pay a lot of attention to valuation because, at the end of the day, your returns will be a function of earnings growth and multiple expansion or compression. So, when multiples are high, the probabilities are that at some point they mean revert and that's going to be a headwind to your long-term returns.

The US election has been a controversial race. Are you thinking about that at all or it's completely out of your mind?

I'm thinking about it, but not from an investment point of view. But we do think about it where it affects our companies. For example, is this a business that relies a lot on imports? I was reading a company transcript yesterday where they were asked, well, what's the impact of tariffs on your business? And they said, if it had been historical rates of 20-25% on the inputs, we can cope with that. We can pass that on to consumers. But if it's 60%, which is what some of the Trump proposals are saying, that's going to be a lot more difficult. So, we look at it but purely from a business point of view rather than from a market point of view.

Are there any other risks that you think investors should be aware of in 2025?

I think probably the key one would be valuation. So what we tend to look at is we look at valuation and psychology and if you actually look at the moment valuations are on the fuller side, psychology is very, very bullish now. We did a podcast actually on Livewire, I think it was in October 2022 or somewhere around then (see below:) And it was such a contrast to today. That was just two years ago. 

Equities

Bob Desmond: We’re finding value everywhere

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Everyone knew there was going to be a recession. There hasn't been a recession, and valuations were incredibly attractive. You could pick up companies like Microsoft (NASDAQ: MSFT) on low-20s multiples, but everyone was waiting for it to get cheaper. It never got cheaper. Now, everyone's waiting for it to get more expensive. So, we don't try and predict the short-term direction. What we look at is the valuation today and what that means for returns over five years. 

What does it mean for returns over the next five years?

Goldman's has obviously got a study out recently. I think they said 3% returns for the next decade. That sounds pretty bleak. It's a lot lower than the long-term average. What we tend to do is we target a return of 8-12% and that's how we communicate with our clients. And we say, where are we at any one point in time? So we would say, where the portfolio sits today, we feel we can get to the middle of that range, maybe slightly to the right, but then that's in direct contrast to something like the end of 2021 where we felt it was almost impossible to even get to the left side of that equation. 

So we look at it in two ways: Where's the market, and where's the portfolio? I would say we feel, all other things being equal, over the next three to five years, we can get clients to double-digit returns and are reasonably confident of that.

Where do you think we are in terms of investor sentiment today? 

We are somewhere close to euphoria. I would say we are very bullish. Maybe it'll keep going. If you think about it, US holdings of stocks are pretty much at all-time highs, similar to what they were at the end of the dot.com era. So, stock holdings are high, sentiment's bullish, AI is going to change the world, and inflation's coming down. 

I mean, it is a perfect scenario, but for markets to keep going up, you need incremental good news from here. If the news starts getting worse, I think that'll put markets under pressure.

What's your outlook for 2025 and are there any key traits that you think will drive quality growth heading into the year ahead?

We don't have an outlook for the year. We just look at today. I would certainly be very cautious if you're just buying the market as it were, or if you're buying themes. Those have run quite hard. So, I would certainly be on the cautious side and in that type of scenario, I mean, I'm obviously going to say that as a quality manager, favour quality, be really clear around your valuations and what businesses are worth. And then opportunistically, if there is a pullback, lean into that. Lean into that as the valuation gap opens up. 

A global portfolio of 10-15 quality growth businesses for the long term

Claremont Global is a high conviction portfolio of value-creating businesses at reasonable prices. For further information, visit their website or fund profiles below.

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