From the desk of the CIO: Mind the market gap

By Bryce Anderson, Head of Multi-Asset Strategies, Australia

Key points

• We’re seeing a wide divergence in market returns
• Loose capital is back and AI leaders are taking advantage
• We recommend a measured view on the macro headlines.

After a ripsnorting rally, markets had a more subdued month reminding us that there can be big differences in returns and AI is not the only game in town. Instead of a rise in most sectors and countries, we saw both losses and sizeable gains. We made money on our healthcare exposure which we hold as a diversifier and for growth as well as Korean equities where we retain a modest position after profit taking.

The big attention grabber was of course the man with the world’s biggest megaphone (Elon Musk) shooting for the stars with an audacious capital raising for SpaceX. Our Morningstar Equity Research colleagues pointed out that the float price for that IPO baked in way too much optimism and it is no surprise that after its brief blast, gravity has taken hold and pulled price back down again. We suspect though that this is closer to the start than the end of a period of easy capital. Expect more capital raisings from in vogue companies tapping equity and debt markets. For the first time in 5 years the investing public are directly involved in funding new investments, not just private capital and the hyperscalers reinvesting their profits.

Our own metrics tracking equity capital supply are very clearly showing conditions easing, meaning that it is becoming much easier to raise larger amounts of money on terms that are more favourable to companies than investors. To be fair it is not on a par with peak speculative episodes in 2021, 2006 or 1999. This time it is dominant franchises or leaders that are seeking funding, SpaceX raised about $85bn, Alphabet $80bn and Korean chipmaking giant SK Hynix $26bn. More is to come with IPOs expected for Anthropic and OpenAI plus fintechs including Revolut and Stripe.

Given our process, we tend to look where the opposite is happening — where capital is leaving and companies are under pressure, often leading to short-term negative share price performance. These conditions create the gap between intrinsic value and price. Consumer cyclicals are one such area today, given the short-term pressures they’re facing. Patience and a long-term approach are key to realising this value, although it may take time, and we don’t know what the catalyst will be. We’ve seen this movie before.

A prime example was oil and gas companies globally during COVID, when heavy discounting created an extremely attractive opportunity despite prevailing sentiment. Investing in these companies paid off handsomely once the discovery of a credible vaccine, and later the supply shocks from the embargo on Russian energy exports in 2022, pushed energy prices sharply higher. These events provided the catalyst for price and value to converge, but neither was anticipated when the initial investment was made. That’s the nature of these catalysts: they’re often geopolitical, and they arrive on their own timeline.

Which is the bigger point about geopolitical risk, including the current US-Iran conflict : their impact is mostly fleeting, and they are simply not predictable. If investing is about getting the odds on your side, then it is better to focus on the fundamentals that drive longer term inflation, interest rates and corporate earnings growth rather than geopolitics. While it’s vital to understand how the economic and political environment is evolving, the keys to generating return and managing risk remain the same: fundamental diversification, broad research, and favouring undervalued investments.

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