Keep calm and stay invested: Oberg and Ruiz give their take on surging equity markets

Last week, I spoke with PM Capital’s Paul Moore about how he is currently seeing the market, how readily he is finding opportunities, and how he prioritises valuation to determine when to get out of positions. 

For anyone who missed that wire, it is available below.

Equities

Paul Moore on why having an exit strategy is crucial with markets at all-time highs

View

Following that conversation, I reached out to Oscar Oberg from Wilson Asset Management and Sam Ruiz from T. Rowe Price with similar questions—although I did not ask for their specific exit strategy. Instead, the question concerned how they would view a market correction.

In the following, I summarise their responses.

Do markets at all-time highs provide pause for thought?

For both Oberg and Ruiz, “concentration” was a major factor when considering this question, with both pointing to narrow leadership.

“Whilst markets are at all-time highs, the composition of returns and sector leadership has become increasingly concentrated over the past 18 months”, says Oberg.

“Markets optically feel very “full”, but in USD terms, it continues to be a narrow story of outperformance by a handful of US mega-cap companies”, says Ruiz.

While they broadly shared similar sentiments on the state of the US market, Oberg also provided commentary on the Aussie market, whilst Ruiz expounded on the AI story.

The Aussie market

According to Oberg, the Aussie market has been driven largely by the ASX 20 and, in particular, the Big Four banks.

On the other hand, he notes, the ASX Small Ordinaries Index and the ASX Small Industrials Index remain 18% and 19%, respectively, below all-time highs.

“So, while we do pause for thought given the ASX All Ordinaries Index is at an all-time high, we believe the environment is ripe for bottom-up fundamental stock picking and continue to see many compelling opportunities that fit our investment process and deliver strong returns for investors”.

US and AI

Ruiz notes that Europe, Japan and Emerging Markets are all around or below their 2021 highs but suggests that the real question concerns whether the narrow, AI-led market continues to pull global equities higher.

While Ruiz doesn’t see valuations near eye-watering tech bubble levels, “the “AI basket” of stocks are trading at high valuations, and this has extended beyond Nvidia to areas such as utilities and electrical component suppliers (given data centre expansion and electrical intensity)”.

He goes on to add that T. Rowe Price views the AI thematic as a real potential productivity enhancer that may result in a longer cycle than some expect. That said, Ruiz believes it prudent for portfolios to recognise that higher valuations may suppress future returns or leave these companies vulnerable to a de-rating.

“This AI-chip-spending cycle is driven by the largest companies in the world and is funded by cash flow, not debt, which in itself makes us a little less nervous about a possible credit cycle”, says Ruiz.

Ruiz adds that he sees it as an inevitability that spending by AI companies will peak and slow, which will likely trigger a reset in valuations for AI-related stocks. This is already being reflected “in our portfolio by trimming exposure”, says Ruiz.

“The good news is, the rest of the market is not nearly as strong and there are more reasonable valuations to be found”.

Hunting for opportunities

As noted above, Ruiz believes there are plenty of opportunities to be found outside of the AI space, where valuations are more reasonable.

Oberg shares this sentiment: “We aren’t short of ideas when we look at the small-cap universe and see a number of companies trading at attractive valuations.”

Oberg is finding compelling opportunities in sectors such as retail, financials, automotive, media, building materials and travel - which are more exposed to general economic conditions.

He also contends, "The major question surrounds when the market is going to sell those high performing, more defensive companies and take more “risk” in coming down the market capitalisation curve to look at small-cap companies”.

He believes it will happen once the market is confident that interest rates will finally fall, “which we hope will be at the end of this calendar year.”

What to do if markets correct?

Both Ruiz and Oberg took the glass (at least) half-full approach to this question. Oberg said; 

 “We would view a market correction as an opportunity to buy, given the dislocation we have seen between small-cap companies and the broader market in the last three years.”

With a similar positive bent, Ruiz said; 

“We are not seeing overwhelming evidence that would lead us to believe now is the time to take all your risk off the table”, whilst also acknowledging that there will be periods of weakness at some point.

Ruiz elaborates that history has shown it is incredibly difficult to pick the timing of a meaningful correction, saying, “We only have to look back over the past five years to show how investors could have been wrong-footed by traditional “warning signs”.

He points to the two years we have endured of a “recession-predicting” inverted yield curve whilst markets have marched higher, as evidence of this.

Ruiz adds, “We prefer to remain fully invested (not time the market) and actively adjust our positioning to reflect valuations, market sentiment, and external risks.”

Oberg shares a similar sentiment: “When determining whether to buy or sell shares, it always depends on whether the stocks fit our investment process. If we see limited opportunities to buy, we can choose to hold cash given our flexible cash mandate.”