It has been a great year for stocks, particularly US mega-caps, driven by the AI boom.
But influential New York-hedge fund manager Ricky Sandler will turn to Europe for his next stock pick at the upcoming prestigious Sohn Hearts & Minds conference this year.
US mega-caps exposed to the AI theme have left other stocks in their wake in the past 12 months.
The so-called “Magnificent 7” index of the biggest US tech stocks has soared 50 per cent, with Nvidia up more than 200 per cent. A 33 per cent rise in the S&P 500 over the past 12 months has also been stronger-than-expected US economic growth. And the Federal Reserve’s success in lowering inflation gives substantial room for interest rate cuts if needed, underpinning the economic growth outlook.
But the AI theme, the economic outlook and the Fed’s ability to cut rates from here are now well understood and substantially reflected in the valuations of the tech giants and the US stock market, according to Sandler, the founder and chief executive of $US7bn ($11bn) Eminence Capital.
That leads him to look for opportunities outside the US and the mega-cap tech stocks.
“I think the things that you would have worried about a year ago have turned out better in terms of actual performance,” Mr Sandler told The Australian.
“The economy has been surprisingly resilient and inflation has come down considerably.
“We could even look forward and say we now have a wealth effect in housing and equities that could help the consumer. “Oil prices have come down, and gas prices have come down a bit.
Overall, Sandler thinks the outlook for stocks is “pretty solid.”
But valuations are high and sentiment is fairly positive, so “the positives are fairly well known.”
In that background, Eminence Capital’s net exposure to stocks reflects a “good backdrop of a solid economy with the Fed on your side, offset by high valuation and sentiment that’s positive too.”
But Sandler says it’s also an environment where he’s “comfortable taking a lot of stock-picking risk”, in large and mid-caps – as opposed to mega caps – more so outside the US market.
“I think the biggest sort of view that I have is that the market should broaden out here, that we should go beyond the mag seven now, and as we get out to more companies below the surface,” he says. “It doesn’t necessarily have to be small caps, but secondary companies.”
“So companies below mega cap – anything between $US2bn and $US50bn – have generally lagged behind. The broader market has lagged behind, so the rally should broaden out.
“So, I think it’s a good time to take some stock-picking risk here.”
Sandler quickly emerged on the radar of a number of Australian investors as the fund boss delivered one of the top performing stock picks at the 2023 Sohn Hearts & Minds investment conference.
For players like Sander, who has about a third of the funds he runs under a short strategy, the real opportunities are in individual stocks rather than the broad market. And a big shift in the drivers of shares over the past two decades has delivered significant opportunity.
Most estimates of the US market have passive funds sitting with ETFs or index trackers at around 18-20 per cent of shareholdings. In some companies, it can reach as much as 50 per cent.
These days a US stock with a $US30bn market capitalisation, is relatively small versus the mega-caps, and can get “washed-around and miss-priced because it’s not as liquid as the big stuff,” Sandler adds.
“So I’d say that’s another theme of ours, that the market should broaden out here, and there’s good opportunity below the surface, and I think good opportunity, even in Europe.
“I will tease you and say that the company I’m going to pitch is not a US company.”
That only narrows it down to about 10,000 companies, but is indicative of Sandler’s thinking about the US market after such a strong and narrowly-led rise in the past 12 months.
“At a big picture level, we aren’t making a call on the market,” Sandler said.
“We don’t want to be negative, we don’t want to be overly positive, but we think we can take a lot of risk in picking individual alpha-generating stocks.”
While the macroeconomic backdrop doesn’t show any big problems in his view, Sandler wants his portfolio to reflect the fact that sentiment is positive and valuations are high.
After stripping out the Magnificent 7 from the S&P 500, it isn’t particularly expensive.
The S&P 500 trades around 21.7 times versus its decade average of about 17.5 times.
But the equal weight version of the index now trades of a 12-month forward PE multiple of about 17.7 times, versus a decade average near 17 times.
“I’d rather look in the companies, below the mega caps, in the US and in Europe,” Sandler says.
“There have been a lot of passive flows into the S&P 500 and everyone’s done great for the last 10 years. It’s been a great index. And so everyone that’s looking backwards, like ‘just keep doing that because it’s worked’. And while I don’t want to sit here and say ‘short that’, I think that you want to start to look at other places where less picked over than just barking the S&P 500 index.
Donald Trump looked to be on his way to win the US election as of Wednesday, boosting US stock futures, the US dollar, Bitcoin and US bond yields, while slamming the Mexican Peso, the Aussie dollar and copper prices. However, Sandler also sees opportunities in China.
“We’re more positive than average on China and that’s not a statement that I know what the government’s going to do and that the economy is going to recover,” he said.
“That is more a statement about the fact that nobody’s talking about China, nobody cares, they think it’s kind of uninvestable. But we would say no, there are some interesting things to do there.
While wary of Chinese stocks that could be hit by US tariffs, Eminence Capital has investments in “kind of normal, consumer oriented things, so like Macau casinos.”
“So I think there are parts that are more wary of parts where I think we can take the risk.”
The 2024 event will explore themes including space, AI, geopolitics, biosciences and investing.
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