Chris Hogbin: Global equity markets have had a very strong first half of the year, but it’s pretty unusual times because on the one hand, equities are contending with a pretty difficult macro backdrop. We’ve still got high inflation. We’ve got interest rates that have risen at an unprecedented rate over the last 18 months with many effects still to be felt. And let’s not forget some of the geopolitical pressures with the ongoing conflict in Ukraine.
On the other hand, we’ve got a lot of excitement about artificial intelligence, and we’ve seen a small handful of stocks really perform extremely strongly in the first half of the year.
Much of their price movement reflects increases in the valuation multiples they attract, rather than a fundamental reappraisal and upgrade of their earnings expectations, with one or two exceptions.
That’s created almost a two-tier market, where you can look at the rest of the market that really hasn’t performed year-to-date. And within that, although there’s clearly a big mix of companies, there are a number of companies that are really actually quite attractive, where the earnings prospects look good and where valuations look pretty compelling today.
So, I think it’s important that investors look at company fundamentals to try and identify quality companies that can perform over the medium to longer term, particularly given there’s quite a lot of uncertainty still around the macroeconomic environment. Secondly, it’s important to think hard about valuations. So, within that cohort of the market, try and find stocks that are attractively valued. And then thirdly, to broaden horizons and think not just in the US domestic market, but to look at where there may be attractive opportunities, and we increasingly see those in international markets and particularly in emerging markets.
For example, in emerging markets, we see a number of economies that are at a different point in their economic cycle: the mature developed markets. We see markets that are benefiting from a reoptimization of supply chains as corporates learn from the lessons of the pandemic and some of the geopolitical trade tensions we’ve seen. And we see interesting secular growth stories, for example, around the climate transition in China.
Artificial intelligence clearly has a huge opportunity to fundamentally change our lives and the economy over the coming years and decades. But I think it’s important to look back at previous periods of technological innovation to see what lessons we can learn. So, if we take ourselves back two decades to the dotcom boom and bust, it’s important to remember the companies that prospered early in that boom; many of them are not with us today.
It’s tempting to get very excited about artificial intelligence and very worried about the macro economy. But actually, our job as fundamental equity investors is to go beyond the headline and really try and figure out: Where is there a secular long-term growth story? What does that mean for industries? What does that mean for companies? And how much of that is priced into valuations today?
This is a time to really step back and conduct thorough, thoughtful analysis to identify which industries will be most impacted and which companies are best positioned to prosper over the medium to longer term.