Expert: Jeremy Richardson, Senior Portfolio Manager, RBC Global Equity Team, RBC BlueBay Asset Management Facilitator: Sascha Calisan, Director, Davies Group
Headlines:
- Rapid industry change creates opportunities, with AI emerging as the next general-purpose technology. Key is finding firms with competitive advantages in applying AI, not just using it
- Rising inflationary pressures from deglobalization, aging populations, and net zero transitions may imply more economic and rate cycle volatility
- Passive inflows may explain extreme valuations and size divergence, acting as a US competitive advantage
Context:
The session covered shifting market regimes in global equities, opportunities in stocks with strong fundamentals despite economic uncertainty, the impact of passive investing flows, and key trends like technology changes and ESG investing.
Decisions include adding artificial intelligence exposed stocks and trimming positions on extended valuations. Action items involve monitoring economic signals, evaluating competitive advantages in using AI, and targeting quality stocks trading at discounts.
Shifting from economic hard landing fears to soft landing hopes:
Market pivot from fears of Fed interest rate hikes causing an economic hard landing last year, towards optimism of a soft/no landing in 2023. This reset from fear to greed is driving equity gains despite fewer expected rate cuts.
Dominance of US equities and mega-cap tech stocks:
US equities now comprise 68% of the global market versus 48% in 2006, with the largest tech stocks extending their lead in profitability over smaller caps.
Debating whether extreme valuations are justified:
The equity risk premium has plunged as investors price stocks with low required returns despite rising rates. Explanations include expectations for lower rates or higher earnings, but possibly also passive money inflows insensitive to valuations.
Transition from deflationary to inflationary forces:
Powerful deflationary forces like globalization and technology boosting supply without inflation have waned.
Passive investing headwinds for ESG and long-term value strategies:
As short-term performance orientation peaked, ESG struggled despite accelerating energy transition. Similarly, quality stock derating enables buying top businesses at market or cheaper valuations.
Key takeaways:
- Monitor economic signals and central bank policy for indications of prolonged soft landing or impending downturn
- Research competitive advantages of AI leaders and adopters across sectors to identify investment opportunities
- Focus purchases on high quality companies trading at discounts to market valuations
