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Constantia Investment Partners - 2023 Annual Letter

2023 was another strange year in markets. The prevailing mood at the end of 2022 was decidedly downbeat, and countless market participants were waiting for ‘something to break’ due to higher interest rates.

While warning against simply extrapolating the existing situation at the end of 2022, even we got in on the act, writing in our 2022 Annual Letter:

...the tide of easy liquidity going out is likely to cause more problems in the year ahead as capital misallocation is uncovered.

The failure of several US regional banks in March 2023 seemed to comprehensively tick this box… and yet, the real economy simply shrugged it off. US inflation has fallen, unemployment has remained low, and corporates have seen decent – if slowing – growth. At present, the talk is of the Federal Reserve cutting rates multiple times in 2024.

We also wrote this in our 2022 Annual Letter (and thankfully, stuck to it!):

We do not optimise the Fund for any specific scenario or macro-economic outcome. [Instead], we try to ensure that the businesses we own could weather a range of possible outcomes. […] In our opinion, it is far better to focus on the factors creating fundamental value over time, than trying to time markets in 2023.

As it turns out, two reasonably certain ways to have earned a sub-par return in 2023 involved getting the timing wrong on 1) being either ‘in’ or ‘out’ of the market, or 2) switching between such abstract labels as ‘growth’, ‘value’, ‘defensives’ or ‘cyclicals’ in an attempt to front-run changes in sentiment.

Looking ahead to 2024, our partners will know by now that macroeconomic predictions do not form the basis of our process. We don’t think we would be any more accurate this year than in 2023. In this regard, our approach remains ‘prepare, don’t predict’.

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