The recent shift in the economic landscape has ushered in significant ramifications for the global marketplace, particularly impacting domestic small-cap stocks. The broadening of tariffs to encompass all US trading partners has heightened fears of a global trade war while increasing the level of uncertainty felt by consumers and businesses.

Amid this turbulent and unpredictable macroeconomic environment, we believe it is increasingly crucial for investors to focus on the quality of their investments. We believe high-quality companies, often characterised by resilient business models and healthy financial profiles, are uniquely positioned to weather economic storms without compromising their long-term growth potential.

Quality 101

Definitions vary throughout the industry, but common characteristics used to identify quality may include low leverage, low earnings volatility, and stable return profiles. However, on their own, quantitative factors have the potential to paint a limited picture of the true resilience of a company.

We believe quality is better assessed using a more comprehensive approach that considers critical elements such as shifting industry dynamics, customer and supplier relationships, and a management team’s strategy and ability to execute, amongst other things. This framework helps identify companies we believe are best positioned to endure downturns while capitalising on expansionary periods, providing sustainable growth through economic cycles

Potential protection to the downside

During periods of elevated market volatility, capital preservation typically moves up investors’ priority lists. While virtually every company is exposed to macroeconomic forces like inflation, tariffs, weak consumer spending, and muted business investment, some quality companies are inherently better positioned to face these challenges (Chart 1).

The power of compounding

Downturns often reveal the true strength of high-quality companies, but the decisions made throughout the business cycle lay the foundation for long-term success. These companies tend to build competitive moats, maintain pricing power, attract best-in-class workforces, and invest strategically when others are unable. Over time, these advantages compound, driving high-return investments that lead to strong through-cycle performance. (Chart 2).