Why remaining adaptable will be key to stock picking success in 2025

With the end of the year approaching, Livewire is conducting a series of Rapid Fire interviews with fund managers from different asset classes. 

For this instalment, I sat down with Eric Marais from Orbis, for his take on the global equities space. Here, he reviews the year that was, his best and worst investments and what he's focusing on in the year ahead - although as you will learn, he's approaching 2025 focusing on adaptability, rather than certainty.  

What’s been the most important factor for global equities in 2024?

It's got to be the dominance of the mega cap tech companies. I'm really sick of saying the words “Magnificent Seven”, so I'm trying to find other ways to still go there.

It's been the talk of the town, particularly for global equities. The most striking way we've looked at this is we do this Monte Carlo analysis that takes random combinations of 50 stock portfolios as a proxy for how a bottom-up stock picker, picking global equities, might put a portfolio together. Then, you can measure over time, in different years, the proportion of those randomised stock portfolios that outperform the index.

You might guess over the long run, on average, about half of these portfolios would win, about half of them would lose, and that turns out mostly to be the case.

But if you did that starting at the beginning of 2023, when these companies took off like rocket ships with the launch of ChatGPT, less than 5% of random portfolios have outperformed the index, starting from 2023.

So it tells you just how narrow the market has been, how important it's been to be in these handful of winners. I think that's been the dominant feature of global equity markets in 2023 and 2024.

Do you think that narrow dominance will continue into 2025?

Well, I'm of the old school belief that valuations still matter.

And so you think expectations sure have reset much higher, as have valuations, and you can see it now when Microsoft (NASDAQ: MSFT) reported earnings, five or six weeks ago now, they had phenomenal numbers by any objective measure, but the stock went down 3-4%. And so it's maybe getting in that range where expectations have caught up with the realities of these businesses.

What about the most surprising outcome of 2024 – what was it and what did you do about it?

For me, probably the most surprising is the fact that Bitcoin tripled. I did not have that one on my Bingo card. 

In particular, the post-Trump acceleration, which you can now in hindsight kind of rationalise, but seeing it now at roughly $160,000… that is quite something.

In 2023, we saw some tech and semiconductor companies do really well, but it was disconnected from what was happening in crypto land. But geez, now it's starting to feel a bit more like that 2021 period when all these things were working together, with crypto really booming.

We're global equity investors. There's nothing we do directly. I suppose we could go and buy Coinbase (NASDAQ: COIN), but we haven't, because we’re not in the game of chasing what others love. But that's one that really surprised me personally.

What was your best investment decision over the last 12 months?

I think our best investment, fortunately, is also quite an interesting one.

We invested in a company called QXO (NASDAQ: QXO), which is a business run by Brad Jacobs, who is really an entrepreneur. QXO is the fourth business that he's founded. He first did a business in the US waste management industry (United Waste Systems, now Waste Management Inc (NYSE: WM)), and he helped formalise and roll up that industry from a very fragmented point to one much more professionalized, into one larger entity.

Then he did United Rentals (NYSE: URI), which was an equipment rentals business - very much the same thing, starting from a tech laggard as an industry and one that was very fragmented. He made a lot of acquisitions in this space, bolted on different businesses, combined them, brought technology to how they operate.

Then he stepped away from that business and did XPO (NYSE: XPO), which was his third go-around. And XPO is a business we've invested in for more than 10 years now. And that's how we got to know Brad.

So when we first looked at XPO back in 2012-2013, we had said, “Geez, Brad has this great track record at United Waste and United Rentals". Then, we looked at XPO where he was targeting the US logistics space, and we thought there was a good chance he'd do a great job doing exactly the same thing. So, taking a very fragmented business, bringing technology to it, making acquisitions, bringing the businesses together, building something of scale, and then moving on. And that's what he's done.

Around 18-24 months ago, he started selling down his stake in XPO. He said he had one more in him, so he's going to start one more business.

And now he's doing QXO, targeting the building products distribution space. So, yet another very fragmented market, one where technology is not used effectively to help businesses be more efficient. The plan here is very similar: try to roll up that industry, bring technology and some scale, and build a real business.

Right now, QXO is essentially still just a pile of cash with Brad attached to it in this plan. We participated in a transaction where QXO raised some capital ahead of doing deals, and that's been reasonably well received by the market thus far.

It’s a little bit unusual for us, given our style, but it's our connection to Brad and our history with him through XPO that really made it interesting to us.

What was your worst decision in 2024?

I'll pick another topical one – Intel (NASDAQ:INTC).

So, we invested in Intel based on two big things. One is that they would see a cyclical turnaround in their end markets. So tick, I think we got that part right.

The second component was that they would essentially take the cash from their core business, which is designing and producing chips that go into PCs, and deploy that cash into building a third-party semiconductor fabrication business where they would make chips not just for themselves but also for third parties—a lot like TSMC. So this is what TSMC does, and it is a hugely successful business. We got that very wrong.

What's happened is Intel has lost market share in its core business, which has meant it has had less cashflow to deploy in building out this third-party fab business. It's also taking them longer and costing them more money to build out the third-party fab business.

So, that piece of the thesis we got wrong, and we had to sell out at a loss because, ultimately, we recognised that the fundamentals were not panning out the way that we expected them to.

What are you most excited about heading into 2025?

Politics aside, one exciting thing for stock pickers with Trump is that there is likely to be more uncertainty, more dispersion.

There are some pockets of real extremities in terms of valuation that we can work with.

So, I think it's actually a decent environment for stock pickers. Market returns have been so good for so long that, to be honest, you haven't really needed alpha to have a great outcome.

I'm hopeful that we've got a good setup for generating alpha for truly bottom-up stock pickers in coming years because it does feel like the environment could be much more volatile now than it has been over the last year or two.

What is the biggest risk heading into 2025?

One thought that occurred to me around Trump was that I've seen a huge amount of discourse on the sell side, the buy side, newspapers, everywhere, that seems to express a lot of certainty around what Trump means for markets and what Trump means for certain sectors.

For example, “These are the sectors that are going to do well. They did well last time, and these are the sectors that Trump liked and didn't like last time, and so on”.

It's easy to take those things at face value because they seem so logical. But I can send you this chart (see below), put together by someone named John Authers, who writes for Bloomberg. He plotted how an index of coal stocks performed since Trump was elected.

Coal was a huge part of, I wouldn't say his agenda, but just at least the narrative - it's a big part of it. It turns out that coal performed horribly under Trump. It's a really striking chart. I'm not saying it's causality, but it's almost comical in retrospect. As soon as Biden was elected, the thing turned around. And since then, coal has performed much better relative to renewables. Again, the exact opposite of what you might expect, right? Because Biden and the Dems are pro clean energy.

I like this example because it seems to me that people seem to express a lot of certainty about what the world is going to look like, but the world is a really uncertain, unpredictable place.

I think we want to be quite adaptable, quite resilient to different kinds of market environments rather than betting the family home on one particular version of the world, which may or may not come true.

What is the market not paying attention to that could have an outsized impact in 2025?

There are two that came to mind.

One is related to Trump. I think Silicon Valley is heavily influencing Trump now because Elon is so closely tied to him. I wonder what that means for this version of Trump versus the past version of Trump. I'm sure it can be quite different.

The other one that comes to mind is it's been quite noticeable how much the rollouts of the new AI models have slowed down.

ChatGPT [version one] and then two, three and four all happened in very quick succession. I believe the focus now has been on a deeper learning model that they've been working on for a while. But the rollout of that has been pushed out, as has ChatGPT 5. So I do wonder about how sustainable the use cases are, how much that will continue to grow into 2025 unless there are new models coming out that are quite meaningfully more capable than the existing ones. I don't know whether usage will continue to skyrocket the way that it did in 2024.

There's a huge amount of the big tech ecosystem that is dependent on that, and a big chunk of the market that is dependent on that doing quite well, and I'm surprised it's not discussed a bit more often.

What big personal goal are you setting for yourself in 2025?

I moved to Australia less than a year and a half ago, so I'm still pretty new. But now that I'm settled, living in Sydney, I want to learn how to sail. I've never sailed in my life, but I want to learn how to sail.

I just feel like one of the best places in the world to learn how to sail is in the Sydney Harbour.

My son has started sailing lessons, he's six, and so I figured if he can do it, I can do it. So I'm keen to learn.

Managed Fund

Orbis Global Equity Fund

Global Shares

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