1Q23 Equity Review & Perspective
A combination of resilient economic data and moderating inflation provided hope that the Federal Reserve’s interest rate playbook might be entering its final innings. A welcome period of improved performance for ZCI’s strategies followed as some investors navigated back to companies that are executing efficiently, implementing operational changes, and guiding to continued secular growth. This optimism was tempered in the final month of the quarter by several high-profile bank failures, and the subsequent scrutiny of financial institutions’ balance sheets and cash positions which generated significant volatility across most asset classes. These developments left investors assessing the extent of future Fed actions and top-down considerations related to the access and cost of capital for individuals and businesses.
The financial world can feel as if it’s traveling at warp speed with dynamic headlines about technological advancements, Fed announcements, economic data disclosures, and corporate statements. The global economy and investor psychology oscillates, cycling between periods of accommodative (hope) and restrictive (despair) conditions, with speculators attempting to forecast and time each hypothesis along the way. Above the fray, ZCI remains unwavering in the view that company revenue, earnings, and free cash flow growth ultimately determine investment outcomes. Two recent events have the potential of disrupting status quo behaviors from Wall Street to Main Street. First, the U.S. regional bank crisis exposed fragility in the banking system and will likely result in tighter lending conditions and more onerous industry regulations. The benefits of operating as a well-capitalized public company should not be taken for granted in this environment. Second, the public release of OpenAI’s ChatGPT (Chat Generative Pre-trained Transformer), an artificial intelligence (AI) and machine learning (ML) language tool that captured the attention of more than 100 million users faster than any application in history. AI/ML concepts have been around for decades, but the industry has arguably experienced its “leap forward moment.” Companies which provide critical infrastructure used in AI development, and those which have large and diverse datasets to train the models stand to benefit as technology and markets continue to evolve. The need for innovation is perpetual, offering exciting and potentially wealth-creating frontiers for investors with a time-horizon long enough to weather the daily noise.