This gentleman's employer, Capital Group, is one of the big investment managers that I rarely think about. If asked for their assets under management I'd guess "a trillion". I'd be off by 150%. They are at $2.5 trillion AUM (I looked it up).
From Neue Zürcher Zeitung's The Market.ch, May 5:
Richard Carlyle, Equity Investment Director of US asset management giant Capital Group, on the winners and losers among the «Magnificent Seven» and the advantages of European and Japanese equities.
«We are seeing an increase in economic momentum in many countries, analysts are raising their earnings estimates and, at the same time, interest rates are set to be cut in various economies. This is a good mix for equity markets,» says Richard Carlyle.
In an in-depth conversation with The Market NZZ, which has been lightly edited for clarity, the Equity Investment Director at the Californian asset management giant Capital Group talks about the winners and losers of the hype around artificial intelligence, and explains why he continues to see a bright future for companies such as Microsoft, TSMC, Novo Nordisk and ASML.
«ASML is one of the most attractive investments in the entire stock market universe»: Richard Carlyle.After a strong start in the first quarter of 2024, equity markets are consolidating. What's your assessment of the environment for investors?
If you look back over the past two years, at various points in time, there was a broad consensus among investors that central banks, primarily the Fed, would struggle bringing down inflation without causing a recession. This has not happened. Today, the consensus has evolved towards a view that the Fed has succeeded in bringing inflation down, in a bumpy trend, without causing a recession in the US. There might be a shallow recession in Germany and in the UK, but the important thing is that this hiking cycle has not caused a severe downtown of the type that many people had feared. Economic growth has been surprisingly resilient. And if you look at earnings forecasts, compared to twelve months ago, they are rising in almost all equity sectors. So markets are reacting to a much more rosy economic outlook compared to what they had originally feared.
Would you declare mission accomplished, then? Has a perfect soft landing been achieved?
There are lots of caveats. We can agree that the current consensus is that a recession will be avoided. But that doesn’t mean it’s all clear. Of course, lots of things could come along that could disrupt this consensus. Think of any geopolitical issue, which would manifest itself through a spike in the oil price, rekindling inflation. That is a worry. Labor markets, especially in the US, are still tight. And because consensus now is for no recession, if we should end up in one after all, markets would probably correct quite significantly. But the consensus right now is that we are home free for the next couple of years.
Last year, it was mainly the US economy that surprised on the upside. But now, leading economic indicators worldwide are pointing upwards. Would you say that, all in all, the world economy is on a path to recovery?
Yes, that’s a fair assessment. The US is strong, India is strong, many economies are pointing upward. China is an exception, with some very particular problems. Overall we see accelerating momentum, and at the same time we have interest rate cuts to look forward to in many economies. So you have growing economic momentum, rising earnings forecasts, interest rate cuts on the horizon, and at some point in the future a large but fuzzy concept of Artificial Intelligence that could give a step-up in potential growth rates. That’s a good mix for investors.
For most of 2023, it was mainly the so-called Magnificent Seven that were driving equity market returns. In the past few months, we saw other sectors, such as industrials, financials, or energy, coming back up. Is the story of the Mag-7 over?
Some of the Mag-7 have phenomenal business models. A growing number of industries are in such a shape that the number one player captures all the value. Think of examples like Amazon. They have a near global distribution system that can do 1-2 day delivery to most of the people on the planet. That's an awe-inspiring feat. Competing head-to-head with Amazon on a broad scale seems nearly impossible. Or think of Microsoft. Does anyone not use Microsoft? They have an almost captive customer base. If they offer an AI add-on for, say, $30 a month, if their customers get good value from that, that’s an enormous opportunity for Microsoft. The number two player is far distant. So, some of the Mag-7 could be here for a long time. But perhaps not all of them. The dynamics that I described for Microsoft may not be the case in the car business. Tesla is facing more competition. Maybe it’s not the same in the streaming business, either.
You're saying the market is in the process of weeding out the winners from the losers among the Mag-7?
Yes, the market is pretty good at this. Take the two outliers among the Mag-7 since the start of the year: Tesla is down roughly 28%. This is likely as a result of an ongoing price war, the growing production volume of China's BYD, and a considerable softening of consumer demand in the business for electric vehicles. At the other end of the spectrum, Nvidia is the best performer, having gained more than 70%. That's a sensible reaction to their quarterly revenue figures, which they are managing to beat despite enormously high forecasts. We have little evidence yet that anyone is coming up that can rival the chips of Nvidia.
The market has identified Nvidia as one clear winner of the AI theme. If we take a longer term view: What other industries do you see that might win or lose with AI?....
....MUCH MORE
