A Message from Mike

Markets Don’t Move in Straight Lines

The past six weeks have been a useful reminder of something investors know intellectually, but often forget emotionally: markets rarely move in straight lines.

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After a particularly strong May, we’ve seen a return to volatility in recent sessions. Headlines have quickly shifted from optimism around technology, earnings growth and economic resilience to concerns about inflation, interest rates and escalating tensions in the Middle East. The result has been a market environment that feels very different from just a few weeks ago.

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Yet when I step back and look beyond the daily movements, I don’t see a market that is fundamentally broken. What I see is a market trying to reconcile two competing realities.

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On one hand, economic data remains remarkably resilient. Employment figures in the United States continue to surprise to the upside, corporate earnings have generally held up well, and many of the businesses leading market performance continue to deliver strong operational results.

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On the other hand, that same economic strength creates uncertainty around interest rates. Investors spent much of the last year trying to determine when central banks would begin easing monetary policy. More recently, attention has shifted towards whether rates may remain higher for longer than expected. Markets don’t particularly like uncertainty, and when expectations change quickly, volatility usually follows.

This is one of the reasons I spend very little time trying to predict what the next interest rate decision might be. The reality is that even professional economists, bond traders and central bankers themselves regularly get these forecasts wrong.

Markets have a habit of humbling those who believe they can consistently predict short-term outcomes.

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What matters far more is understanding the businesses we own and the long-term themes driving them.

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The companies leading global markets today are not being valued solely on what happens over the next quarter or even the next year. They are benefiting from structural trends that are likely to play out over many years. Artificial intelligence, cloud computing, cybersecurity, digital infrastructure and automation continue to attract enormous levels of investment from both governments and corporations around the world.

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We’re seeing this firsthand across many of the companies we follow. Businesses involved in providing the computational power, software infrastructure and security systems required to support this next phase of digital growth continue to report strong demand. While share prices may fluctuate week to week, the underlying adoption of these technologies continues to accelerate.

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That doesn’t mean valuations can’t become stretched, nor does it mean markets won’t experience periodic corrections. In fact, healthy pullbacks are often a normal and necessary part of abull market. They remove excess optimism, reset expectations and create opportunities for long-term investors willing to remain patient.

Another factor worth mentioning is currency.

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For Australian and New Zealand investors with international exposure, currency movements can sometimes have as much influence on short-term portfolio returns as the underlying investments themselves. Over the past year, a stronger Australian dollar has acted as a headwind for unhedged global investments. More recently we’ve seen the Australian dollar weaken back towards longer-term average levels, providing some relief after what has been a challenging period from a currency perspective.

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Importantly, currency movements tend to be cyclical. Over long periods of time they often balance out, which is why we generally view them as a secondary consideration rather than a primary investment thesis. In our diversified portfolios we continue to maintain a combination of hedged and unhedged exposures, recognising that nobody consistently forecasts currency markets with any degree of precision.

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The events unfolding in the Middle East are another reminder that geopolitical risks never completely disappear. Every decade presents its own set of challenges, whether they be wars, political uncertainty, financial crises, pandemics or inflation shocks. While each event feels unique in the moment, markets have historically demonstrated an extraordinary ability to adapt, adjust and ultimately move forward.

As investors, our job isn’t to predict every twist and turn. It’s to build portfolios capable of navigating them.

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That’s why our focus remains on owning high-quality businesses, maintaining diversification where appropriate, managing risk thoughtfully and avoiding emotional reactions to short-term market noise.

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The temptation during periods of volatility is always to do something. History suggests that more often than not, the better decision is to remain disciplined, stay invested and keep focused on the bigger picture.

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May rewarded patience. June is testing it.

In my experience, successful investing requires both.