Key takeaways:
- While artificial intelligence (AI) remains an important investment theme, investors may benefit from broadening exposure beyond concentrated technology markets as earnings growth expands across regions and sectors.
- International ex U.S. markets appear underappreciated relative to the opportunities created by improving earnings growth and scarce capital.
- Geopolitical events can create short-term noise, but maintaining a diversified, long-term investment approach focused on earnings and profit cycles remains critical to navigating uncertainty.
Definitions
Alpha: A measure of investment performance relative to a benchmark, representing the portion of return attributed to active management or investment skill.
Capital scarcity: A market condition in which investment capital is relatively limited, which may create opportunities for higher returns where funding is less readily available.
Cash flow: The net movement of cash into and out of a business over a specific period, reflecting its ability to fund operations, investments and obligations.
Central bank policy: The actions and decisions of a central bank, including setting interest rates and managing monetary conditions to achieve economic objectives.
Discretionary management: An investment approach in which portfolio managers make investment decisions on behalf of clients within agreed guidelines and objectives.
Diversification: A risk management strategy that spreads investments across different asset classes, sectors, regions or securities to reduce concentration risk.
Duration: A measure of a fixed income investment’s sensitivity to changes in interest rates, expressed in years.
Earnings growth: An increase in a company’s profits over time, often used as an indicator of business performance and potential investment value.
Emerging Markets: Economies that are developing and becoming more integrated into global financial markets, often characterised by higher growth potential and higher risk.
Federal Reserve (Fed): The central banking system of the United States, responsible for conducting monetary policy and maintaining financial system stability.
Leading economic indicators: Economic data series used to assess and anticipate potential changes in economic activity and business cycles.
Macroeconomic investing: An investment approach that considers broad economic factors such as growth, inflation, interest rates and policy decisions when allocating capital.
Monetary policy: The actions undertaken by a central bank to influence money supply, interest rates and financial conditions within an economy.
Non-consensus opportunity: An investment opportunity that differs from prevailing market expectations or widely held investor views.
PMI (Purchasing Managers’ Index): A survey-based economic indicator that measures business activity and economic trends in the manufacturing and services sectors.
Profit cycle: The pattern of expansion and contraction in corporate profits over time, often influenced by economic and market conditions.
Quantitative investing (Quant): An investment approach that uses mathematical models, data analysis and systematic rules to make investment decisions.
Return on invested capital (ROIC): A measure of how effectively a company generates profits from the capital invested in its business.
Secular theme: A long-term structural trend that can influence economic growth, industries or investment opportunities over an extended period.
Systematic strategy: An investment strategy that follows predefined rules or models to make portfolio decisions, with limited reliance on subjective judgement.
Thematic investing: An investment approach focused on long-term trends, innovations or structural changes expected to drive future economic or market outcomes.
View transcript
Matthew Bullock (MB)
Hello and welcome. I’m Matt Bullock, the Head of Portfolio Construction and Strategy for EMEA and APAC here at Janus Henderson. And I’m delighted to be joined by Mike Contopoulos, who is the Head of Multi-Asset Macro Investing.
So Mike, good to have you here. So you’ve been in London this week talking to clients about how you see the world from a multi-asset perspective. So what have been some of the key messages and, in particular, what are the things to watch for the remainder of the year?
Mike Contopoulos (MC)
Yeah, I mean, obviously, Matt, probably the biggest thing is what’s going on with AI and how should we think about that? Are we in a bubble? What should investors do? From our perspective, it’s pretty clear you need to be in the space, but be very conscious of what’s going on and don’t overweight it. There’s tremendous opportunity outside of AI, and I think helping investors understand that opportunity and realizing that it’s not just a technology story anymore, you know, yes, maybe in 2023 and 2024, the world is all about technology and you have the concentration to prove it, of course, but over the last 18 or so months you started to see real broadening.
Earnings growth is broadening across the world, Europe, emerging markets and even in non-tech US. And you saw that last year with Europe outperforming the US with no Mag seven. I mean that’s pretty amazing right. And so I think the big topic has clearly been AI. And our view is sure. But you’ve got to diversify. You’ve got to diversify away from technology into the rest of the world.
The second thing I would say central bank policy, what’s going on with central bank policy? Is the Fed going to hike interest rates. What’s the ECB going to do? Japan is reflating. How does this affect investments? What are you doing about it? That’s probably the second thing that most investors want to know. And from our perspective the end conclusion is underweight duration as rates go higher.
MB
So with both of those really there’s a common thread throughout all of that which is really geopolitics. And so, geopolitics has been centre stage. So it’s a question that comes up a lot which is how reactive should investors be to geopolitical instability versus sticking to longer term trends in a portfolio?
MC
Yeah. So you can’t be obtuse to geopolitics. You need to know what’s going on. But you also don’t want to be event driven. That’s not what we do. From the macro investing side of Janus Henderson. We focus on profit cycles, not what’s going on from geopolitics. Now, to the extent that geopolitics affect profit cycles, then certainly you need to pay attention.
But we’re going to pick that up through, you know, big macro measures, leading economic indicators, PMIs, things of that nature. What’s going on with the inflation data. What are central banks doing to react to geopolitics. These are all inputs into our profit models and profits I think matter more than geopolitics.
When you buy a stock you’re buying a piece of a company, a piece of the earnings and cash flow and future growth of that company. So many investors have forgotten that in today’s day and age. And I think that we have to remind people that although geopolitics are important, how we live our lives and what we talk about at the dinner table, when you’re an investor, you’re investing in companies cash flow and earnings.
So that’s what we’d rather pay attention to rather than one off geopolitical events.
MB
So Mike, with your role, you’re sitting across a lot of different asset classes, which means that you get to see a lot of the opportunities as well that are out there. So right now. What are you where are your highest conviction views? Where are you investing today?
MC
I sort of, you know, hinted towards this in my previous comments about broadening. I think you can almost be anywhere in the world other than in speculation, other than in concentrated markets, and do quite well. We quite like international markets in particular. You know, we have a saying within our group return on invested capital will always be greatest over long periods of time where capital is most scarce, not where it’s most plentiful.
Many studies suggest that in the US, only about 8% of clients’ portfolios are in international markets – talk about scarcity of capital. Clearly, it’s in the international space and in the international space you have growing earnings growth. So we think there’s a huge, underappreciated opportunity in international.
And that in and of itself is broadening because you’ve had so much concentration in US technology, communication services, and discretionary. It’s all big, one technology trade – I call it the tech complex. And so, we think broadening in particular broadening to international markets will be really the best place to be, not only the next 6 to 12 months, potentially the next 6 to 10 years.
MB
And so a final question. And now we’re talking about longer term views here. And so how do you see macro multi-asset investing evolving as far as the problem it solves and also how clients use it?
MC
Yeah. So I think there’s always going to be a place for top-down macro driven portfolios. Multi-Asset, all equity, all fixed income. The whole gamut of it. Right. And we obviously, you know, try and do the best that we can for clients and constructing these portfolios. But I also think there is a growing, a bigger need for systematic and quant. And thematic strategies is a diversified to discretionary management of portfolios.
Many of these strategies can take advantage of big secular themes to drive alpha. We think one of those themes that could be emerging is in European independence. Think about it as Europe basically needs to break away from the rest of the world and deliver investment in defence and technology and pharmaceuticals in energy.
You know, these are big areas of growth that could prove huge opportunities going forward. And creating a systematic strategy around that could be something that’s really interesting going forward. And systematic strategies in general, we think could be a great way to diversify. For manager discretion. And, and I think will be a bigger part of investing within a multi-asset portfolio going forward.
MB
Great. Well, we’re out of time, but thank you so much. You know, we could talk for hours, I think, on the topic because it is such a topical area. But thank you very much for your time. And most importantly, thank you very much to the audience for listening.
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