Podcast Summary: Best of The Long View: Investing
The Long View with Morningstar
Release Date: December 24, 2024
Hosts: Christine Benz and Team
Description: This episode compiles the most insightful discussions from 2024, featuring portfolio managers, economists, and investment thinkers who delve into a broad spectrum of investing topics, including asset allocation, risk management, and market trends.
1. The Dominance and Future of the Magnificent Seven
Speakers: Joel Fried (Primecat Management) & J.B. Taylor (Wasatch Global Investors)
Joel Fried discusses the significant impact of the Magnificent Seven—Apple, Microsoft, Google, Meta, Amazon, Nvidia, and Tesla—on the US equity market. Currently, these seven companies account for 28% of the S&P 500's value.
“The law of large numbers kicks in. We think the market assumes that this group of companies will grow revenues at a compound annual rate of at least 10% over the next five years.” [04:12]
Fried expresses skepticism about sustaining such growth, citing increased competition and the inevitability of creative destruction in tech industries. He draws parallels to Walmart’s early dominance, which was later disrupted by Amazon.
J.B. Taylor adds that the prolonged outperformance of large-cap stocks, especially the Magnificent Seven, has skewed market dynamics. He highlights the attractive relative valuations of small-cap stocks compared to their large-cap counterparts.
“The small cap index is trading at about 13 times earnings today and the large cap index is trading at about 20 times earnings. But the Magnificent Seven are trading more like 40 times earnings.” [15:45]
Taylor suggests that a reallocation towards small caps could yield substantial performance gains once the momentum shifts away from mega-caps.
2. Evolution of Consumer Staples and Defensive Investments
Speaker: Jody Johnson (Capital Group)
Jody Johnson reflects on the transformation of the consumer staples sector. Once a bastion of consistent growth, many consumer staples have struggled with inflation and shifting consumer behaviors, particularly in food and beverage sectors.
“Consumer staples have struggled with inflation and pricing, especially in food and beverage areas. There have been relatively few consistent winners in that area.” [22:30]
Johnson notes a strategic pivot towards more selective investments within consumer discretionary and a tilt towards healthcare and technology as new defensive sectors.
3. The Rise and Risks of Covered Call ETFs
Speaker: Brian Armour (Morningstar's Passive Strategies Research Team)
Brian Armour critiques the burgeoning popularity of covered call strategies in ETFs, highlighting their tax inefficiencies and opportunity costs.
“Most covered call strategies are highly tax inefficient. The premium received from covered calls is not considered a capital gain and must be taxed as income.” [29:10]
He underscores the significant underperformance of covered call ETFs compared to their benchmarks, citing the Global X Nasdaq 100 Covered Call ETF (QYLD), which has underperformed QQQ by an annualized 10 percentage points since its inception.
4. Fixed Income Markets: Leveraged Loans and Private Credit
Speaker: Sonali Peer (PIMCO)
Sonali Peer discusses the expansion of leveraged loans and private credit markets, noting their impact on the high-yield bond sector. She explains how private credit has absorbed lower-rated issuers, thereby improving the overall quality of high-yield bonds.
“Private credit has provided a lifeline for some of the B3 and triple C credits that would have otherwise had to default.” [35:50]
Peer highlights the structural changes and increased deal sizes in these markets, raising questions about their sustainability in potential economic downturns.
5. US Economy's Resilience and Inflation Dynamics
Speaker: Neil Shearing (Capital Economics) & Sebastian Page (T. Rowe Price)
Neil Shearing addresses the unexpected resilience of the US economy, which has so far avoided recession despite various headwinds.
“We've been able to have a fall in inflation without there being necessarily a big contraction in demand.” [43:20]
Sebastian Page criticizes economic forecasts for underestimating the economy's strength amid aggressive fiscal policies and external shocks like the COVID-19 pandemic and geopolitical tensions.
“Inflation economists got it wrong. The economy, while decelerating fast, was still pretty good.” [46:05]
6. National Debt and Long-Term Fiscal Risks
Speaker: Carl Tannenbaum (Northern Trust)
Carl Tannenbaum warns about the escalating US national debt, projecting it could reach 200% of GDP by mid-century. He emphasizes the potential risks of investor confidence waning and the challenges policymakers will face in managing the debt ceiling.
“Our debt is 100% of our GDP and could be twice that level by the middle of this century.” [50:15]
Tannenbaum urges policymakers to avoid brinkmanship to maintain economic stability and investor trust.
7. Diversification and International Equity Opportunities
Speakers: David Harrow (Harris Associates) & Rajeev Jain (GQG)
David Harrow expresses concerns over the US fiscal situation, predicting a weaker dollar and persistent inflation due to aggressive fiscal policies.
“I don't see how the dollar strength could continue. I really don't.” [53:30]
Rajeev Jain counters by advocating for global diversification, emphasizing that corporate earnings will ultimately drive returns across different markets.
“Corporate earnings will drive returns and diversification ensures exposure to a diverse investment universe.” [56:45]
8. Japanese Small Caps and Emerging Markets
Speaker: Carl Vine (M&G, London)
Carl Vine highlights the attractiveness of Japanese small-cap stocks, noting their significantly mispriced valuations due to limited coverage.
“In the small cap universe in Japan, it's mispriced because no one's looking. We find globally relevant companies trading on super low valuations.” [60:20]
He points out the growth potential in niche, well-run companies that have been overlooked by larger investors.
9. Biotechnology Investments in Emerging Markets
Speaker: Justin Levrentz (Invesco)
Justin Levrentz discusses the burgeoning opportunities in biotechnology within emerging markets, particularly China and Korea. He emphasizes the role of these regions in CDMO (Contract Development and Manufacturing Organization) spaces and the resurgence of Chinese biotech innovation.
“There's a large talent pool in China for life sciences, and many Chinese scientists are building innovative biotech companies with global potential.” [65:40]
Levrentz forecasts significant growth in biotech sectors, driven by advancements in gene therapy and other cutting-edge medical technologies.
10. Artificial Intelligence: Transformation and Investment Implications
Speakers: Ankur Crawford (Fred Alger) & Jeremy Grantham (Investor and Market Historian)
Ankur Crawford explores the far-reaching impacts of artificial intelligence on various industries, from data centers to industrial sectors. He forecasts a sharp revaluation of businesses based on their adaptability to AI.
“Businesses that can't be AI'd will receive lower multiples, while those that can integrate AI effectively may see their valuations increase significantly.” [72:10]
Jeremy Grantham draws historical parallels, cautioning that while AI is transformative, it may also lead to speculative bubbles similar to those seen during the Internet and railroad booms.
“The more important the idea, the more it attracts too much short-term attention, leading to inevitable crashes, followed by the emergence of a few super leaders.” [78:25]
11. Asset Allocation: Stocks, Bonds, and Cash
Speaker: Dan Ibison (PIMCO)
Dan Ibison advocates for a balanced asset allocation strategy, emphasizing the renewed attractiveness of fixed income given current valuations and higher yields.
“Fixed income can be a return generator in absolute and relative terms, offering less volatility compared to equities.” [84:00]
He suggests that high-quality bonds may outperform equities over the next five to ten years, particularly as fixed income valuations have improved post-interest rate hikes.
Conclusion
The episode of The Long View offers a comprehensive examination of current investment landscapes, emphasizing the dominance of mega-cap stocks, the potential resurgence of small-cap stocks, the evolving dynamics of fixed income and consumer staples, and the transformative impact of artificial intelligence and biotechnology. Experts caution against overreliance on historical trends and stress the importance of diversification and strategic asset allocation in navigating a complex and rapidly changing market environment.
Notable Quotes:
- Joel Fried on the Magnificent Seven's growth expectations: “[...] growth rate of at least 10% over the next five years.” [04:12]
- J.B. Taylor on small-cap valuations: “[...] small cap index is trading at about 13 times earnings today.” [15:45]
- Carl Tannenbaum on national debt risks: “[...] debt is 100% of our GDP and could be twice that level by the middle of this century.” [50:15]
- Ankur Crawford on AI’s impact on business valuations: “[...] businesses that can't be AI'd will receive lower multiples.” [72:10]
This summary is intended for informational purposes only and does not constitute investment advice. For personalized guidance, consult a financial professional.