Riding the Fire Horse: investing through transformative times

The Year of the Fire Horse began on 17 February 2026. It arrives only once every sixty years – a convergence of the Horse’s sprinting intensity with the fire element. Together, they form a year characterised not by gradual change but by disorienting transformation. Traditional Chinese philosophy treats it as among the most charged and consequential cycles in the zodiac.

It is a year in which speed and change are features – in which decisions that might normally take months happen in days, and standing still carries its own risk.

Yet the same intensity that drives breakthroughs can be destructive when not managed with discipline. The ancient wisdom is not to match its wildness, but to counterbalance it.

Its last occurrence was 1966, characterised by the escalation of the Vietnam War and the Cultural Revolution in China. Those who lived through it will remember its turbulence. Hindsight brings its significance into relief.

The economist Joseph Schumpeter gave this process its most enduring Western name: creative destruction. Forces that appear in the moment as chaos are, in retrospect, a cleansing renewal.

This Fire Horse announced itself immediately. Q1 2026 has been one of the most complex and multi-layered quarters in living institutional memory – defined not by a single shock but by many, arriving as rapidly as the old texts describe.

Active military conflict in the Middle East has pushed energy prices to their highest levels in years and further stressed the architecture that underpins global trade and commerce.

Simultaneously, a transition in the US Fed’s monetary policy regime has raised questions about the institution’s independence, and fractures in the AI investment narrative have prompted a sharp rotation in market leadership.

In a quieter period, the deposition of Venezuela’s leader or inter-NATO sabre rattling over Greenland would each have commanded months of commentary. In the Year of the Fire Horse, they are footnotes.

While the global index has fallen by mid-single digits, this hides the fact that individual security dispersion has hit the highest levels in decades, with stocks lurching by 10 percent either way. Bond market volatility has risen, and Brent crude has touched $120 per barrel.

This combination – elevated equity and bond volatility alongside high energy prices – is historically rare, last seen in Q1 2003 following US military action in the Middle East.

No matter the label – Fire Horse or creative destruction – the question is the same: not whether the transformation is coming, but whether you are positioned to move with it and capture the opportunities within the renewal

The cost of reacting

Quarters like this one reliably produce the same instinct: act. Hedge. Re-position. Reduce risk. The impulse is entirely understandable – and, historically, almost entirely counterproductive.

The most rigorous academic work on this question – Caldara and Iacoviello’s Measuring Geopolitical Risk, published in the American Economic Review in 2022 – draws on 25 million newspaper articles across 120 years.

Geopolitical shocks do cause initial declines in stock prices, investment, and employment – the paper is clear about this, and so are we. But long-term equity damage has only occurred in a handful of events. Outside of these, markets recovered – in most cases, faster than expected by consensus.

The paper also separates geopolitical threats – diplomatic crises, military buildups, sanctions – from geopolitical acts, the actual outbreak of conflict.

Threats bring maximum uncertainty and weigh on markets; once acts materialise and some portion of the unknown becomes known, the mechanism reverses. The investor who acts at the peak of the threat systematically captures the downside without the recovery. In most cases, the best activity is no activity.

As long-term investors, we occasionally get accused of ignoring geopolitics. That couldn’t be further from the truth. But unlike many, we don’t play the game of what might go wrong next. We focus on what has actually changed in the earnings power of the businesses we own and their potential value over the long term.

Resilience by design

It won't come as a surprise that we’ve avoided sweeping, knee-jerk portfolio changes. Don’t mistake this for complacency. We are acutely aware that recent performance has tested clients’ patience, and restoring confidence through delivery is our immediate priority.

Today’s environment carries echoes of 2022: higher energy prices raising the spectre of ‘stagflation’, potential monetary tightening, dollar strength, and emerging market foreign exchange pressures. That period taught hard lessons: that in times of stress, portfolio correlations driven by duration, valuation, or sector can become exacerbated.

Recognising this, we’ve strengthened processes and spent the last 18 months refreshing the portfolio. As a result, it’s materially different and much more resilient than the one we held four years ago.

These changes are best understood through three Ds:

Diversification

The effective stock count has risen from 23 to 25, and factor risk as a proportion of index-relative volatility has fallen by nearly 50 percent: from 60 percent to around 30 percent. Exposure spans digital infrastructure, energy transition, new-world finance, and healthcare innovation.

Duration

Approximately 65 percent of holdings sit in the top two quintiles of relative duration – an unavoidable cost of owning businesses whose most significant value creation lies ahead. But this has fallen by 20 percent since 2022, and holdings in companies with negative earnings have been reduced from around 10 percent to 3 percent.

Discipline

The portfolio's net debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio stands at 0.7x against 1.5x for the broader market. Free cash flow margins have risen from 12 percent in 2022 to 15.5 percent today. These businesses have been stress-tested by Covid, an aggressive rate-hiking cycle, and successive tariff regimes. The PEG (price/earnings to growth) ratio has fallen from 2.2 to 1.3, indicating we are still paying a premium for growth, but a far more measured one.

Portfolio price to earnings growth

Figures based on the representative account. Data 31 March 2023 - 28 February 2026.

The result is a portfolio with materially less indiscriminate valuation risk than it carried in 2022 – better insulated against the discount rate sensitivity that proved so damaging in that period, and better positioned to hold conviction steadily through the Fire Horse and beyond.

The opportunity in the disorder

Managing near-term volatility and positioning for long-term opportunity are not competing objectives. The enhanced processes implemented over the last 18 months – to improve our ability to maintain conviction during turbulence, rather than being shaken by it – have proved directly valuable this quarter.

Finding opportunity across the AI value chain

Our holdings at AI’s infrastructure layer are performing precisely as the thesis requires.

TSMC remains our largest holding – a disciplined monopolist serving a customer base committed to securing capacity through 2030, capitalising on a profit pool that three generations of pricing power have made structurally larger.

ASML is the enabler behind the enabler: its peerless machines, now achieving 220 per hour – up from 100 – will set the pace of advanced manufacturing through the late 2020s.

ARM completes the value chain: the architect of the chip designs inside virtually every AI-capable device on the planet, with royalty revenue growing 25 percent year over year. NVIDIA’s recently announced Vera CPU – built on ARM cores – meaningfully expands that royalty opportunity.

ARM designs the chip blueprints. TSMC builds the chips. ASML makes the machines that make it possible.

These three companies have benefited from the visibility and materiality of investment into compute to enable AI, and have been among the quarter’s top performers. Formal reviews of TSMC and ASML revealed that while the market’s view is moving closer to our own, these businesses’ pricing power and growth duration can still surprise to the upside.

The market, however, is actively wrestling with the long-term return prospects for companies investing in compute (eg hyperscalers), and the most recent quarter saw sentiment swing towards the bears.

Microsoft is the portfolio’s clearest example of the debate around AI monetisation. Azure growth remains robust and commercial bookings have risen sharply, with record committed future revenue even when excluding contracts from its important partner, OpenAI. Despite this, the shares have sold off amid concern about the scale of AI-related capital expenditure. We find the anxiety understandable in isolation, and unpersuasive in context.

Crucially, Microsoft is not investing speculatively. It is deploying capital to support clear, existing demand across Azure and its productivity software, including Copilot agents. Capacity has been a genuine constraint, and today’s spending reflects disciplined investment to reinforce long term competitive advantage, not an attempt to chase near term AI enthusiasm.

We’ve focused on identifying companies with structural advantages that are multifaceted and difficult to disrupt.

Shopify reported Q4 revenue growth of 31 percent to $3.7bn, with gross merchandise volume exceeding $124bn. This is not a storefront builder AI will disintermediate – it is the transaction engine underneath commerce, running checkout, payments, fraud prevention, and fulfilment.

MercadoLibre has delivered 28 consecutive quarters of above-30 percent growth, in USD terms. In markets where online penetration sits around 15 percent, the investment case is the 85 percent that remains.

We continue to hold both with conviction. We have, however, moderated their combined size. The portfolio carried approximately 12 percent across four commerce platforms simultaneously – Shopify, MercadoLibre, Sea, and Kaspi – creating an undesirable aggregated scenario risk. We have reduced these combined positions to approximately 8 percent, which better balances our ongoing conviction in expected returns with the widened range of outcomes.

The rebalancing has freed capital for enterprise SaaS (software as a service), where the indiscriminate sell-off has created entry points into businesses we have long admired.

Veeva Systems – whose software manages clinical trials, regulatory submissions, and compliance workflows for global pharma – is the clearest example. These are not workflows AI disrupts; compliance obligations do not disappear because language models improve. Veeva’s data moat, management quality, and pricing discipline make it one of the better-compensated risk-reward profiles in enterprise software today.

Duolingo faces more self-inflicted near-term pressure, stemming from over-monetisation that degraded the free-tier experience. Management has acknowledged this and is now prioritising learner experience over margins. The thesis has not broken, but we must now see better delivery.

Looking through the headlines on energy prices

Rising energy costs tend to accelerate the transition our investment cases are predicated upon – increasing the economic urgency of renewables, grid resilience, and energy efficiency.

Brent crude forward curve shifts higher (2026-2028)

Source: CME/ICE futures, Goldman Sachs, BNEF, JP Morgan.

We’ve already seen this dynamic play out. In 2022, after the Ukraine invasion, the majority (66 percent) surveyed by the European Investment Bank said the war and resulting high energy prices should accelerate the green transition. 

Encouragingly, in 2025, global clean energy investment hit a record $2.3tn – double that of fossil fuel supply investment – marking the second consecutive year that clean energy spending outpaced fossil fuels.

Clean energy’s rapid expansion has led to bottlenecks in the grid – by mid-2024, around 1,650 GW of wind, solar, and hydropower sat in advanced development awaiting connection, while AI data centres are simultaneously creating dense new pockets of demand.

Prysmian, which was added to the portfolio in 2025, sits at this exact pressure point, manufacturing high-voltage and subsea cables that connect offshore wind farms, reinforce overloaded transmissions, and link electricity markets across borders. The opportunity ahead is substantial – the annual high-voltage cable awards market, worth roughly €3bn in 2019, is forecast to reach six times that figure by the end of this decade.

Importantly, higher energy prices do not dampen data centre construction; hyperscaler capex is demand-driven and largely price-inelastic. They do, however, intensify the urgency of managing every watt efficiently.

Schneider Electric sits at the intersection of both themes – helping grid operators manage the surge in renewable supply, and helping data centre operators reduce the energy cost of compute. As energy becomes more expensive, both propositions become more valuable. 

Schneider has secured billions in supply agreements with US data centre operators, and its partnership with NVIDIA to co-develop AI data centre reference designs embeds it into the physical architecture of AI compute. No other holding sits as neatly at the intersection of both structural themes in this letter.

Amid the noise, one of the quarter’s most consequential developments passed with little fanfare in Western media. China’s new Five-Year Plan commits to doubling non-fossil energy capacity within a decade, replacing 30 million tonnes of coal annually, and deploying $5tn in grid investment.

For CATL, these are procurement schedules. When clean energy stocks outpace oil majors in the immediate aftermath of an oil shock, the market is telling you something important about the direction of travel.

In a quarter dominated by headlines about energy scarcity, China’s systematic commitment to structural energy abundance is the signal that the transition is accelerating, not stalling.

The fundamentals endure

The portfolio enters the second quarter in strong operational health. Sales have grown at nearly twice the index’s rate over the past five years. Forward sales and earnings estimates both comfortably lead the index – these are businesses building the world that comes after the current disorder, not clinging to legacies through it.

History’s lesson is not that geopolitical risk is trivial. It is that the cost of overreacting to it is real, measurable, and borne entirely by those who confuse turbulence with terminus. Most of the time, across most crises, the world stabilises, businesses adapt, and capital compounds for those patient enough to remain.

The Fire Horse has always known what Schumpeter later named: that the chaos of transition and the opportunity of renewal are not opposites. They are the same force, seen from different vantage points. We intend to stay at ours.

Past performance

Annual past performance to 31 March each year (%)

Annualised returns to 31 March 2026 (%)

Source: Revolution, MSCI. USD. Net returns have been calculated by reducing the gross return by the highest annual management fee for the composite. Since Inception: 3 January 2017. 1 year figures are not annualised.

Positive Change composite is more concentrated than MSCI ACWI Index. 

Past performance is not a guide to future returns.

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