Global and Australian economies and markets are holding up better than was expected just four months ago, according to the Schroders Australia investment team, but that doesn't mean the good times will last forever.
"The surprise of the past four months is that the Australian economy in general, and businesses in general, have held up better than people expected in the face of higher interest rates. This was particularly the case across the retail sector, where the pointy end of economic slowdown is normally felt as consumers tighten their belts. It really wasn't as bad as it could have been," said Martin Conlon, head of Australian equities at Schroders Australia.
Sebastian Mullins, head of multi-asset at Schroders Australia, added that the discussion in the US around what kind of 'landing' for the economy and markets was expected has also shifted.
"Now the discussion is around how strong the US economy is and that's caused our economics team in London to increase their forecast for US growth from a low of 1.3 per cent for this year, up to 2.7 per cent," Mullins said.
"Rather than having a crash landing or a hard or soft landing we have a reacceleration in the US. It's almost like when a pilot aborts a landing on an airplane, you have to reaccelerate before you try and land a second time."
In other global opportunities Mullins pointed to Japan, even though it is in a technical recession.
"We do like that economy because the equity market still looks cheap and there are structural reasons for it to do well," he said.
"We also like other asset classes like Australian credit. That's giving a pretty healthy yield for the high quality." Noting that spreads are high relative to their own history and against global corporate spreads.
However, Conlon said caution is needed around some of the very high valuations for the AI and tech related companies.
"I still believe 'That it's different this time' are some of the most dangerous words in investment and the reality of market valuation levels, particularly in the US market, are high by historic standards and they are very high relative to interest rates," he said.
With the US representing close to 70 per cent of the global market cap - with approximately 30 to 40 per cent of that market in tech and communications - but only about 18 per cent of global GDP, there are some obvious overexposures for not just the US but all international investors.
"There is a big presumption there that the profit growth of particularly those big technology companies is going to keep on growing, and it's going to be durable forever. And when the companies underlying that position are, for the most part, global monopolies, I think that can be a sign of complacency. Those numbers and valuations give me a lot of pause for thought," Conlon says.
But that doesn't mean that tech and communications, and AI in particularly, aren’t worthy of investment.
"I am a believer that AI is going to do a lot of wonderful stuff. But I think, as I alluded to earlier, the profit projections of where, and how it's going to change the profit pools of the world, are probably running ahead of what is most likely to happen," Conlon said.
Mullins concurred, but cautioned against ignoring the Magnificent Seven just on AI valuation concerns.
“Earnings in these stocks have continued to beat expectations because their current business models have been delivering, very little AI earnings can be attributed to current results,” noting they have double the margins and have grown free cash flow twice as fast as the other 493 stocks in the S&P 500.
“While its likely these stocks pull back after a strong rally, it’s premature to call them a bubble,” he said..
