Amid a trend towards deglobalisation and deflation, Schroders has alerted investors to the necessity of adapting their investment strategies from the past decade, emphasising the need for more innovative and lateral thinking to uncover new opportunities.
During a recent media briefing in Sydney, Martin Conlon, Schroders’ head of Australian equities, emphasised his ongoing strategy of seeking opportunities beyond the dominant sectors of technology and AI, which he referred to as the “epicenter of madness”.
He remains steadfast in his approach despite the prominence of the Magnificent Seven stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – that, he said, often overshadow the remaining 493 stocks in the index.
Looking at the Magnificent Seven, Conlon said he finds it “fascinating” that the weight of these stocks in the MSCI World is “more than the UK, China, France, and Japan put together”.
“Nvidia is bigger than the entire basic materials sector, Microsoft’s bigger than the energy sector – these are some pretty astonishing numbers,” he said.
“It’s just alarming though that people are sucking up those numbers, still pumping money into index funds that, when I stand back from it, look pretty astonishingly unsustainable.”
Despite the resilience of many investors in the face of soaring market valuations, Conlon expressed concern over this complacency.
“Anyone who has been around for a while, and it depends on what paradigm you’re used to in investing, but most older people who have seen some market cycles look at multiples today and say, ‘These are high’. They make you worry.
“Most younger people are sitting there saying, ‘Don’t worry, all I have to do is buy global compounders at any price and I’ll be fine’. I look at that and think, I don’t see that logic at all.”
In a market growing more uncertain, Conlon also expressed frustration with individuals who speak about the future with unwarranted certainty. From his perspective, investments should focus on approximating the right decisions and aligning probabilities in one’s favour.
In this context, he outlined Schroders’ alternative plays to uncover value in the market, such as pathology and radiology as “sensible forms of healthcare spend” which also offer exposure to the artificial intelligence (AI) trend.
“Pathology and radiology are among the most interesting AI plays from my perspective because they’ve got massive datasets that very reliably predict pathology and radiology tests. Doctors are afraid of those trained models, but they will work, and companies like Sonic Healthcare have massive datasets.
“Interestingly, with AI, it is those datasets that are the value. It’s not the power of AI. You look at large language models and the scarce assets are the cleaned datasets that allow AI to produce those amazing results.”
Conlon also highlighted the significant attention on the energy transition and the substantial investments required to modernise power grids for a decarbonised economy.
“Everybody in the world wants copper at the moment. What are we thinking?
“Well, things like aluminium are one of the most conductive metals, they get used a lot in power panels and such, and given there’s not enough copper in the world, our take would be [that] people will again have to work out ways and technologies to use things like aluminium to solve those problems,” Conlon said, pointing out opportunities in ASX-listed stocks like South32 and Alumina.
Magnificent 7 influence questioned
In a blog piece penned for InvestorDaily, Brent Puff, senior portfolio manager at American Century Investments, said while investors may have benefited from the strong rise of the Magnificent Seven, the tide could turn and the risks of being concentrated in these stocks rise with their prices.
Similar to Conlon’s perspective, Puff elaborated that increasing US Treasury yields and other factors have collectively dampened the momentum of certain major players within the Magnificent Seven. Additionally, Puff noted that the extensive influence of these seven giants in the US stock market arguably establishes a new benchmark for “narrow leadership”.
“Investors would be wise to keep diversified as history shows too that when large-cap companies have posted significant outperformance, they underperform in subsequent years,” Puff cautioned.
To read more from Puff, click here.
