The Tacit investment philosophy is grounded in the belief that the valuation you pay for an investment today will have a material impact on your future returns from that investment. In simple terms, buying something which appears expensive today reduces the chances of positive real returns being generated in the future as the current price is discounting more future profitability today. If a company beats these future growth expectations it can still be a good investment but if it doesn’t, it is highly likely disappoint or worse, to lose you money. This is an asymmetrical risk that many have lost sight of as zero interest rates led to excessive risk taking: be this in technology companies, cryptocurrencies or the Gilt market in the UK.

As our readers will know, we believe that the world of zero interest rates has gone and is not likely to return, driven partly by the increased geopolitical risks but also by tariffs becoming the political answer to fracturing trading blocks. Whether you agree or disagree with Brexit, for example, it has had the impact of initiating trading barriers which are tariffs in all but name. Similarly, the US and China are now locked into hostile tariff wars.

In such an environment we believe investors need to focus on the direction of travel rather than the individual events that grab the daily news headlines.

In the current environment all Tacit strategies have high exposure to Asian companies through our two favoured managers: Jupiter Asian Income and Prusik Asian Equity Income. To remind readers, although we do not invest directly into stocks in portfolios our chosen fund exposure is an expression of our internal view to ensure clients have exposure to the correct types of companies in the regions we favour.

As well as seeking a higher exposure to the region for demographic and economic reasons, it is the types of companies that our strategies are exposed to that has driven us towards this region: lower valuations than equivalent UK and European companies, better starting and growing cashflows driven by better demographics, lower trade barriers within the region, and, most importantly, the better economic backdrop with lower inflation and stronger government and company balance sheets. This region is at a different stage of economic development and provides the tailwind that companies need to grow in real terms.

The table below illustrates the valuation differential (compared to the global equity universe) which has not been this wide for over two decades as low interest rates have meant that investors in the UK and Europe have shunned the region, considering many of these companies as boring.

At Tacit, we see this as a multiyear opportunity as the global economy adjusts to the new structural headwinds we highlighted in our introduction.