Taking Advantage of Uncertainty


October 2023


In 2023, equity markets faced significant challenges. A resilient economy and solid employment figures were overshadowed by concerns such as persistent inflation, increasing interest rates, and looming recession fears. Additionally, the ripple effects of the COVID pandemic persist.

Many businesses are still addressing the surplus inventory accumulated during the early phases of the economy’s reopening. Amid these challenges, several companies have scaled back discretionary expenditures on projects, like IT upgrades. Driven by rising wages and input costs, management teams are emphasizing cost reduction to safeguard profit margins. This has led to what can best be described as “rolling recessions,” impacting different sectors at various intervals.

From an investment standpoint, this climate of uncertainty has prompted a surge towards cash and fixed-income securities. Ironically, the after-tax returns on many of these “safe” securities are lagging behind inflation rates.

The Silver Lining

Yet, within these challenges lie opportunities. The rising capital costs are prompting business leaders to scrutinize their operational costs. Notably, several high-growth, low-margin entities are now prioritizing profitability and free cash flow. This shift in focus is not the only sign of optimism. Technological innovations, particularly in artificial intelligence, are heralding a fresh investment era. Companies with robust financial health are capitalizing on this phase, acquiring distressed or smaller rivals. The aim? To re-emerge from the downturn stronger and more profitable.

From an investor’s perspective, there is an impending need to seek returns to outpace inflation and maintain purchasing power. Interestingly, a recession might alleviate certain economic strains, like labour shortages. This could result in decreased interest rates, giving investors a renewed sense of confidence.

Pembroke’s Approach

At Pembroke, our strategies hinge on meticulous market analysis. We rigorously assess our holdings for valuation, balance sheet resilience, and their track record in navigating past economic challenges. The nature of the market’s trajectory—whether it is a “soft” or “hard” landing—does not define our approach. Instead, our focus is on backing companies equipped to withstand either scenario.

The prevailing market dip presents investment opportunities, particularly in franchises witnessing plummeting valuations as investors gravitate towards cash. Historically, larger cap equities tend to be more resilient in tough market climates. However, 2023 has been an exception. If we exclude the performance of a few dominant mega-cap companies in the U.S., numerous large capitalization stocks are also floundering.

For Pembroke’s core small and mid capitalization growth strategies, the current valuation combined with solid fundamentals hints at a promising recovery. Predicting the exact timing of such upturns is inherently challenging. The market’s volatility in 2023 can be disconcerting. Yet, as history has shown, turbulent market phases often sow the seeds for potential growth opportunities.


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This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.