00:00Head of global investment research at FTSE Russell. Great to see you this morning. And look this is a market
00:05that's been able maybe with the
00:07exception of a few hiccups in the past days able to fight higher energy higher yields because earnings have been
00:12so strong. So how
00:14crucial is it that we get a big showing from Nvidia today. So in broad market time I would say
00:20this that yes it's true despite the immense
00:22risk in the macro backdrop equities have really had a strong rally. And there are two or three things two
00:29good things and one risk
00:31concern that we have out there. Earnings growth is very strong. And year to date valuations are really related so
00:39that markets are
00:40much better placed on the valuation front today. Having said that the rally and this I'm talking globally it's become
00:47so narrow. We
00:49like to say that the market is running out of breath. It's getting narrower and narrower. And I just throw
00:56one statistic. If
00:57you see the year to date and I'm talking returns for the FTSE all worlds around 35 percent have come
01:03from just 13 AI or semi
01:06companies. 13 companies is just 0.25 percentage point. If you see the April rally 50 percent of the returns
01:14came from those 13
01:16companies. If you see May 100 percent of the rally has come from those 13 semis or AI companies. It's
01:23getting narrower and
01:24narrower. And that is something that every investor needs to be called. So the rally is narrow and we can
01:30obviously feel and see that
01:31in on the Bloomberg terminal. But what about the rest of the index. I mean aren't we seeing margins still
01:39expand for the vast majority of S&P 500
01:44companies. I mean earnings growth has been amazing for the whole market. Yes. Let me take it on a global
01:49scale because it's true that
01:51globally if you look at the 12 month forward earnings just in the last three months those earnings have expanded
01:56about anywhere between
01:57five to six percentage points with the growth in earnings expectations being particularly strong and Korea and Taiwan. Japan is
02:06strong. Brazil is strong. Brazil is strong. Mexico is fairly strong. So it is true that there is earnings growth
02:13but one has to look for
02:14these drivers. AI is certainly a driver but there are other drivers forming in the market. Two of them are
02:20the commodities and the
02:23third big theme in the market is this whole on-shoring and re-shoring that is leading to resurgence or
02:31potential resurgence in
02:33manufacturing in many parts of the world. One of it being Europe. The whole made in Europe concept that they
02:39just passed
02:39with the Industrial Accelerator Act in March of this year. It could have big reshoring implications. Mexico is benefiting
02:47from that reshoring too. So AI commodities strategic on-shoring or friendly shoring. These are three themes that are leading
02:55to
02:55pockets of strength and margin expansion for sure. One of the interesting things Bank of America recently had their fund
03:01manager survey that they published yesterday. For one you had a huge in record allocation moving into equities. We also
03:07had 40 percent
03:08of respondents saying that they saw a second wave of inflation as the biggest tail risk. Are those two connected.
03:15Are people
03:15starting to think or maybe they have for some time that equities are the ultimate inflation hedges earnings keep pace.
03:21Yes
03:22that's a very good point to make in the sense inflation is really becoming a concern right now. It's no
03:28longer about inflation
03:29expectations going up. You're seeing actual inflations come in higher which is why you're having this huge bond sell off.
03:36Your 10 year long yield sovereign yields are anywhere between one to three decade high across the developed world.
03:43That is certainly something that can impact equities. So yes it is something to be of concern. Having said that
03:50equities are an inflation
03:52hedge. So parts of the equity world where revenues can keep growing where margins can keep expanding. And for that
04:00right now it is important to think of the structural thematic drivers. It's AI who's benefiting from AI because the
04:07AI story is
04:08becoming more and more granular hardware versus software. It's hardware within hardware. If you're doing capex is there a direct
04:16link to the
04:16revenue. It's not just about doing capex. So the AI story getting more granular the commodity story getting more
04:23focused on energies food critical minerals things like that. And where is onshoring or strategic onshoring
04:30happening means there are potential tailwinds both for return on equity or margins to increase and valuations to
04:36potentially go up. So but to be clear the AI capex story expands far beyond just the hyperscalers right
04:45communication services far beyond IT hardware chip makers because we're looking at a company like
04:53caterpillar as an AI play now a company like ford as an AI play come now a company I can't
04:59remember the
04:59name but one that makes boilers right. Wilcox. Yeah. So like this capex is driving margins in like seven out
05:10of
05:10the 11 S&P 500 industry groups to expand. That is true. The whole AI capex story is now look
05:17at the picks
05:17and shovels not what is necessarily immediately associated with the word AI but look for the pickles
05:23and shovels and the deep in the weeds of what goes into AI that is becoming critically important. I would
05:29also
05:29argue that we are yet to see this you know another effect of the AI the productivity boom. It is
05:35very well possible
05:36that this AI story while it looks narrow today the next wave is going to come from the huge productivity
05:41room not
05:42just in the United States but across the globe. So the AI story is getting more granular but look for
05:48the picks and
05:49shovels and where is the capex in any way connected to the AI story. It's along the themes of why
05:56is listed
05:56infrastructure doing so well because data centers and data centers coming up in many other parts of
06:01the world. So think through deep in the weeds of the AI story and the second and the third order
06:07beneficiaries of AI that would be one way to look at it for sure.
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