T. Rowe Price embraces the unloved as euphoria grips markets

Markets are becoming increasingly complacent, with warning signs flashing red across various facets of the financial sphere. 

That's according to T. Rowe Price global and Australian equities portfolio specialist, Sam Ruiz, who argues this period of euphoria and complacency has stemmed from central banks opening the stimulus flood gates, prompting cashed-up consumers to throw their savings at markets. 

"If we're in that complacency phase, this period of euphoria, we think less about a binary response but acknowledge that it’s hard to predict where you are. Because if we're in, dare I say it, a bubble, there's a very big difference between being late cycle or early cycle," Ruiz says. 

Despite this warning, T. Rowe Price isn't rushing to repositioning its portfolios. In fact, Ruiz says the team is still finding plenty of opportunities, particularly within the out of favour segments of the market. 

In this interview, Ruiz shares why he believes investors should refrain from trying to determine how many years we have left of this cycle and instead focus on avoiding pockets of excess and finding sustainable growers. Plus, he also shares some helpful tips on how to be a better investor. 

Edited Transcript

Ally Selby: To start off, what actually motivates you as an individual?

Sam Ruiz: We work in a super competitive industry and I'm pretty competitive myself, but I think I’m also very inquisitive.

I think of markets as a constantly evolving puzzle. The moment you feel like you've figured something out, markets have a really interesting way of humbling you and teaching a new lesson. What motivates me professionally is the constant drive to understand where markets are going.

The real thing we're striving for in markets is to have an insight into the future, but also to be faster than others in gaining that insight. Competing with my peers to try and find that insight first is something that I find really exciting.

Ally Selby: Do you have an example of one of those humbling experiences?

Sam Ruiz: When we were in the midst of COVID-19, around March last year, we were trying to get rid of as much risk as possible. I think we did a decent job of pivoting risk back into the portfolio, but that was just such a different playbook you had to look from. So I think a lot of people struggled with that; this whole disconnect between the economic recovery versus the expected recession and what markets eventually did was pretty humbling.

Ally Selby: Can you take us through a little bit of your background and how it actually shaped your investment philosophy?

Sam Ruiz: Thinking over the last decade or so, we've seen an incredible amount of innovation, disruption, a lot of that has stemmed from tech. And when we think about our philosophy, it has a very strong focus, particularly on who the true special businesses are that continually compound, take share and grow year after year.

We really think the market continues to underestimate the value of these businesses compounding year after year after year. And that's why the very large majority of companies we're looking for are these types of special companies I keep referring to.

We think that if you have an approach that continually identifies these, maybe in pockets that haven't been found before, that's a pretty good ingredient for strong returns. I'd say that there are multiple humbling experiences you have in markets as well. So it's not just about focusing on the strongest growing quality companies, it's also trying to think about how do you blend in from a portfolio construction perspective, diversity and balance in the portfolio, something we put a lot of emphasis on, not just focusing on what we know, but also being humble about things we don't know as well.

Ally Selby: What is one topic or investment theme that you and your team are spending the most time debating right now?

Sam Ruiz: It's very hard to get away from the topic of inflation. I mean, that's what everyone's talking about right now. But something that is probably the most challenging thing to debate right now is really COVID in general. So where are we in terms of the lifecycle of this pandemic? And what's the pathway back to whatever the new normal is, not just normal because there are going to be a lot of structural changes on the other side of COVID-19 that I think it's really hard to predict, but you have to be thinking forward about that. And why that theme in itself at the top level is something we are debating is because all the key debates happening in markets are really stemming from that. So that has big impacts or ramifications for interest rates, for inflation, for the future of monetary policy, business behaviour, consumer behaviour, all of this really stems from how the world responds to and gets past COVID-19.

Ally Selby: How is that impacting your portfolios?

Sam Ruiz: That's having a very big impact on everyone's portfolios. 

The rotation has been extreme, I'd almost describe it as bipolar within markets, because you have one month where value does incredibly well and then growth does really well, but these types of oscillations are also happening on a daily basis. 

So within our portfolio, given we are focused on these truly special durably growing businesses, we were early to introduce more cyclicality to benefit from the inevitable recovery trade or rotation that we've seen. We're actually finding now that while we had a really good opportunity during COVID to pick up cheap oversold cyclical businesses, we’re getting a similar opportunity now in select Growth stocks because the market just doesn't want to own anything that was a 2020 winner.

Ally Selby: Where do you see us in the market cycle right now?

Sam Ruiz: In terms of the market cycle, we often think about where we are in the CRIC cycle. So you have the crisis, you have the response, you have the improvement and then you have the complacency. 

We think that we're more towards the end, somewhere between improvement and complacency. Now there's a lot of obvious warning signs. We've all heard about retail investor behaviour, new issuance in markets and also cryptocurrencies. 

This is all something that has stemmed from central banks opening the flood gates of stimulus. A lot of this money is finding a home in markets and investor risk appetite has increased dramatically.

If we're in that complacency phase, this period of euphoria, we think less about a binary response but acknowledge that it’s hard to predict where you are. Because if we're in the later stages of, dare I say it, a bubble, there's a very big difference between being late cycle or early cycle.

Thinking back to the tech bubble: we had very smart people like Alan Greenspan talking about irrational exuberance back in 1996, and there was a lot more to run in markets for the following four years. So, we think that we're somewhere in that sort of extreme sentiment phase, but we're not really trying to rush into getting overly defensive right now.

Ally Selby: How many years do you think might be left of this stage?

Sam Ruiz: Anyone who could predict that – and they can’t – could make a lot of money. 

But I think right now, you don't want to try and determine how many years we have left. I think you want to think about where the pockets of “extreme” are located.

The first pocket of extreme was in a lot of these mid-cap software companies, many of which were trading on revenues alone, having not even generated profits. This is probably the best way to describe how extreme sentiment got: Pre-COVID, you might be trading on average around 10-times EV-to-sales for these businesses, but they rocketed up above 30-times EV-to-sales. But now, some of these names have sold off 30% or 40% in a matter of months in 2021 but are still double the multiples at which they were trading before.

They might look cheap relative to the peak crisis of COVID, but there could be more pain there. So we're trying to think about where the pockets of excess are, as opposed to trying to think about holistically when the market may run its course.

Ally Selby: What’s one theme that investors should focus on getting right over the coming decade?

Sam Ruiz: Investors need to recalibrate their expectations. We're at a point now where markets are up 70% or 80% from the bottom they hit last March. There are not many places you could have invested that would have seen you lose money over the past 12 months, because almost everything went up in synchronisation. To get it right, and this really aligns with how we think about investing, you want to think about which businesses truly will succeed over the next two to three years. We ask ourselves the question, “If the markets close today and we couldn't trade anything for the next three, five, seven years, what would we want to own now that would be worth the most on the other side of that?”

The biggest debate right now is about this inflation cycle. How hot is it? How long is it? And the market is really asking where the greatest acceleration is going to be. Do I want a business like Zoom (NASDAQ: ZM) or DocuSign (NASDAQ: DOCU) – that may see large deceleration, but still decent growth, or a business that maybe is going to accelerate 300% because it was decimated during COVID. So trying to time that is a big challenge.

Markets are forward-looking. They tend to predict these things quite well in terms of where the peak is. 

My advice for investors would be to think about the businesses that can continue to grow sustainably and will be worth more over that longer time horizon. Because picking this cycle is very tough - you might time it well on the way up but no one knows when it will hit that apex.

Ally Selby: Is there one stock that you would be happy to hold if the market closed for three years?

Sam Ruiz: We really like Zoom at the moment and it's quite a controversial name because it really is in that basket of companies that had extreme tailwinds from COVID, but which many investors think people really won’t want post-COVID. We hear about Zoom fatigue, even from the CEO of Zoom himself, who mentioned it on an earnings call. So, this is a business that saw a 300% revenue acceleration during COVID and the market doesn't want to own it now because it's going to decelerate somewhere between 40% and 60%. Now, if you think about what that's meant for the stock, it's actually underperformed the broader global equity index by 60% since September.

The market thinks this business doesn't have any second acts. We actually believe that Zoom is going to turn that tailwind from COVID into new verticals that the market's not anticipating.

We believe Zoom will be a central communications platform for large enterprise, not just video conferencing. And if I can give you one example, it has actually recently launched an internet phone. This is where you can have a phone on your desktop, one flat fee per annum, providing unlimited calls anywhere in the world. It took their largest competitor two decades to actually get three million subscribers. Zoom was able to get one million in 2020 alone, and that's going to be upwards of 10% of the revenue base already growing further and accelerating - and the market's not even thinking about how Zoom can actually do this on a broader scale.

Ally Selby: And just finally, what’s one piece of advice you could give investors seeking to be more successful over the coming decade.

Sam Ruiz: It is very simple. If you don't understand something, don't invest in it. If you want to understand it and want to invest in it, find someone that does.

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T. Rowe Price Global Equity Fund I

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