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17 | 2023 Investment Outlook | December 12, 2022 INTERNATIONAL EQUITY High-Quality Compounders Offer Recurring Revenues and Pricing Power KEY POINTS William Lock Companies with pricing power and recurring revenues that can grow their Head of International 1 earnings steadily in real terms across cycles are likely to outearn the market. Equity The sharp compression in the valuation of higher-growth stocks has provided 2 the opportunity to add some new names to the portfolio. High-quality compounders with recurring revenues and pricing power should 3 protect revenues and margins in a downturn. Bruno Paulson What We Are Seeing Portfolio Manager, International Equity ƒ The MSCI World Index forward P/E multiple is more in line with the average from 2003 to 2019 (before COVID), shifting our focus to the vulnerability of broader market earnings. ƒ Recent client meetings suggest that many asset owners have been reducing exposure to higher- growth stocks and are drawn to the more defensive characteristics of high-quality stocks. ƒ We believe now is a particularly good time to own compounders, since their pricing power (the ability to pass on costs to consumers) and recurring revenues (the propensity toward repeat purchases) can make their earnings resilient in tough times. ƒ High-quality compounder companies that can grow their earnings steadily in real terms, across cycles, are likely to outearn the market, just as they have done over the last few decades. When supply normalizes (or possibly even overbalances into excess supply), true pricing power comes into its own. ƒ Investing in companies with true pricing power is crucial because earnings should be relatively resilient in a squeeze on the wider market’s profitability. What We Are Doing ƒ We continue to focus on high-quality compounders regardless of the market backdrop. ƒ Among these are favorite consumer brands, mission-critical software services and quality- assured health care companies that possess strong intangible assets, which are generally difficult to recreate or duplicate by competitors. ƒ The sharp compression in the valuation of higher-growth stocks has provided the opportunity to add some new names to the portfolio and has influenced the additions and reductions within our global portfolios this past year.

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