2025: A Space Odyssey 

Among the more outlandish (or should I say extraterrestrial) plans put forward by the Adviser-in-Chief, Elon Musk, is the idea that we could land rockets on asteroids and mine them for their gold deposits.¹ A modern day Da Vinci he may be, but surely this is in the realm of logically possible but physically impossible, just like time travel, teleporting and finding a pint of Guinness in London at Christmas. At the very least perhaps we should treat this like one of the great Florentine’s more farfetched (at the time) inventions like the helicopter: great idea but it’s going to take a few hundred years before the sketch can become a reality. 

With Musk alongside Trump, 2025 could be a spectacular year. The new administration is going to “end inflation” while cutting taxes and slashing regulations, both of which would normally be inflationary. They are going to deport thousands of illegal and undocumented immigrants at the same time as “reigniting explosive economic growth”. And he has grand ambitions to devalue the dollar at the same time as introducing tariffs on foes and friends alike. And of course, bring peace in our time. It sounds like a tough job, but who better to do it than a man who survived two assassination attempts and will be both the 45^th and the 47^th US President, the first president with non-consecutive terms in 130 years, ably assisted by arguably the most enigmatic businessman the world has ever seen. 

Moving from theory to practice

Promises are one thing, but what is actually achievable? If we look first at the promise of slashing government bureaucracy, cutting “at least $2tn” of annual spending from the $6.75tn annual budget² would free up funds for tax cuts while also reducing fears that Trump’s policies may stoke inflation. Yet doing so might be impossible without tackling popular entitlement programmes, such as Social Security ($1,562bn), Medicare ($935bn) and Medicaid ($600bn), which together account for almost half of the budget. Bipartisan support for increasing the debt ceiling also means that interest payments ($1,016bn) are unlikely to fall, and Defence ($905bn) is practically untouchable for most Republicans. Even if all remaining discretionary government spending was cut, from Education to Agriculture and Transportation, which in itself is highly unlikely, they would still fall short of the $2tn target. 

Moving beyond the inflexibility of mathematics, the new team has to agree over what they want to cut, yet the post-election harmony within the MAGA camp has already showed signs of breaking down into discord. Musk has recently clashed with prominent supporters over H-1B visas, which allow for the hiring of foreign skilled workers, and is seemingly at odds with Trump’s nomination for health secretary, Robert F. Kennedy Jr, over the use of semaglutide-based weight loss drugs for the treatment of obesity.

Even if workable policies can be found upon which the disparate and uncompromising individuals can all agree, the third barrier is getting them past Congress and its often-byzantine bureaucracy. Although the Republicans now have a clean sweep, their majority is thin in the Senate and almost non-existent in the House of Representatives.³ Republican law makers will have to weigh up toeing the party line and threats of deselection by Trump’s team with holding onto voters in their home districts. And ripping up policies will first need to get through the hundreds of committees that sit within Congress before even getting to a vote, which could in many cases take months. This is partly why previous administrations have failed to enact substantive reforms and efficiency gains.⁴

The final obstacle in the dynamic duo’s path is of course the dreaded “unknown unknowns”. We only have to time travel back five years to these very shores, when a newly elected Boris Johnson, with his own Adviser-in-Chief Dominic Cummings, was going to “Get Brexit Done”, fix the NHS and overhaul the civil service. There probably is a parallel Universe where all these things did get done, but unfortunately we are living in the one where Covid happened instead. 

Quality Growth forecasts

Making macro forecasts and predictions may be a fun exercise at this time of year, but it is also an almost useless exercise when it comes to helping us make investment decisions. And with the unpredictability of Trump together with the current warp speed of scientific and technological progress, it seems an even more futile task this year than usual. What can we as investors do when faced with such boundless optimism? 

Rather than trying to predict what may happen you can try to analyse scenarios. There are clearly stated aims from the incoming administration and you can assess how the success or failure of these aims will affect your investments. This is something we have already done when looking at tariffs, one of Trump’s policies that may directly affect some of our companies. As with all of his policies, we are not assuming that Trump will push through higher tariffs, nor trying to predict to what level he will take them. But, by assessing which companies are most exposed to a world of higher tariffs in specific regions, we can then weigh these risks alongside the other risks and prospects for those companies, as well as their valuations, to make more informed portfolio construction decisions. 

Some investors may then decide to apply their own probability to these scenarios and invest accordingly, or they may decide to wait until the picture around success or failure becomes clearer before deciding to invest. Some will apply hedging and options strategies to boost or protect performance in the case of the most extreme scenarios. Our Quality Growth philosophy prevents us from having to make these tough investment decisions. The high-quality businesses in the Seilern universe have been selected exactly because they can weather different market environments. Their secular growth drivers, such as ageing populations, the humanisation of pets or the transition from cash to electronic payments are trends that will likely continue long after the term of this President. In addition, these very same high-quality businesses have an arsenal of tools at their disposal to protect them, from high returns on invested capital that enable them to continue investing even if higher tariffs increase costs, to strong competitive positions that allow them to pass on pricing if inflation makes a comeback.

Looking back

Since the first month of the year is named after the two-faced god Janus, it would be remiss to look ahead to 2025 without looking back at 2024. Some may query the above confidence in this Quality Growth philosophy given the lacklustre returns of the previous year, especially in a year when many indices, gold and even crypto saw spectacular returns. As we pointed out frequently last year, many of the companies and sectors that we did not hold such as semiconductors, defence companies and banks, fall foul of one or more of our Ten Golden Rules, a framework we use to manage risk. Even if the stock prices double and treble, we cannot and will not own businesses that do not meet our strict tests. This will almost certainly cause us to lag benchmarks when these companies and sectors are in favour, as happened last year.

But it also lagged because of what we did hold. First, many of the long duration businesses in the portfolio were held back with the US10Y yield rising from 3.8 per cent to 4.6 per cent; not as dramatic as 2022 but still a marked rise. Second, several of our stocks encountered difficulties which drove their stock prices down. We manage the risk of our portfolios on the basis of their earnings risk and aim to have as diversified a source of earnings growth as we can. It is highly unusual to see so many disparate and unrelated events drive stocks lower at the same time. Fears around the disruptive effect of AI, weak macro leading to declines in US vet visits and a weak biotech funding environment came at the same time as changes to the Italian meal voucher system, lower growth in TAVR heart procedures and the tragic murder of an executive of one of our companies. All of these affected different companies within our portfolio. Yet with the business models intact, earnings growth in most cases the same or better and similar levels of diversified earnings risk, the expected returns for our companies have improved and prospects for the year ahead are good. 

Confidence amidst uncertainty

So 2025 may be the year that Trump signs a Mar-a-Lago Accord with China, brokers peace deals in Ukraine and the Middle East and starts stockpiling bitcoin so that it reaches $200,000. But it could be the year that another scandal sees crypto plummet, that China invades Taiwan and that the Trump-Musk honeymoon comes to an end. And of course, it could also be the year when none of these things happen. 

In a world of uncertainty, we gain confidence from the individual prospects of our companies, their ability to generate high and predictable levels of earnings growth. These companies reduce the levels of uncertainty which all investors face. They don’t remove it entirely. As 2024 so readily demonstrated to us and for you as our investors, even the best companies can be shaken by bouts of doubt. But by focussing on company fundamentals, we try to stay one step removed from the madness of crowds. It is this stability and predictability in a world of uncertainty, noise and fog, that gives us the confidence to keep doing what we have done for the past 35 years. 

Q. Macfarlane,

31^st December 2024

¹Musk is not alone in this belief. NASA’s Psyche mission was initiated in 2015 and is currently en route to the asteroid Psyche to learn more about it.

²All figures from Congressional Budget Office (CBO), https://www.cbo.gov

³With the resignation of Matt Gaetz, the Republicans’ 219-215 majority can only afford one defection, as occurred with the recent election of House Speaker. Their 53-47 majority in the Senate affords them a little more room with two potential defections possible.  

⁴Whether it was Reagan’s commission to “root out inefficiency” in 1982, Clinton’s ‘National Partnership for Reinventing Government’ in 1993 or even Trump’s previous attempts to cut red tape in 2017, tearing up regulations and cutting spending proved far harder than the initial outlining of grand saving plans.