Why all this good news could be bad for markets

While economic data may have improved in some areas more than others, helping stoke investors' hopes of a soft landing in the US, there is a risk that "good news is bad news in that stronger macro data might mean the hiking cycle is not over." 

That's according to Alphinity Investment Management's Mary Manning, who notes that while the S&P 500 has suffered its worst month since the beginning of 2023, the Index is still up 16% year to date. 

In case you were wondering, an equal-weighted version of the S&P 500 has only risen 4.87% in 2023. 

We can see little hints of this idea, that too much good news is bad, off the back of the results season in the US. 

In fact, 79% of the companies that reported earnings for the second quarter in the US reported actual EPS figures above analyst estimates. This is above the five-year average of 77% and about the 10-year average of 73%, according to FactSet's John Butters. 

Interestingly, though, companies that reported positive earnings surprises were beaten down by the market. For instance, Tesla's shares plunged nearly 10% on the back of the world's most valuable (by market cap) car manufacturer's positive result. The stock has continued to slide 9% since then. 

In this wire, Manning answers Livewire's questions ahead of her appearance at Livewire Live on September 12th. This includes key learnings from her recent trips to China and the US, core holdings within the portfolio today, as well as a new position in the portfolio. 

Plus, she also shares one thing she believes the rest of the market is missing and two movies investors should have on their watchlist this weekend. 

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You recently got back from a research trip in China and the US. If you had to summarise a key learning from this time, what would it be?

Earlier in the year, I was in North America and went to a Venture Capital (VC) conference in Silicon Valley. My takeaway from this conference was that, to state the obvious, VC investors and large-cap tech investors look at businesses very differently. One of the VCs outlined their investment process: find an amazing core technology, get the right people, develop a minimal viable product, generate revenue, scale the business, inflect to positive free cash flow, then think about earnings if you haven’t exited by then. This was interesting for me because Alphinity starts with earnings and works backwards through all those other factors to gain confidence in the forward earnings trajectory. We can learn a lot from talking to VCs and vice versa.

Has the team bought into any new stock ideas recently?

The Alphinity Global team has been to 14 different cities on five continents with over 200 meetings year to date. So yes, we have lots of new ideas and good insights from on the ground. I do have a new idea that was generated from the team’s travels and from a deep dive analysis into a new product, but I am pitching it at Livewire Live so am not giving away any secrets now!

We also recently bought Ferrari (NASDAQ: RACE). The brand needs no introduction. The stock is high quality and high return with decent growth and reasonable valuation. Since its IPO in 2016, RACE has been a classic bottom-left to-top-right stock. Perhaps I should organise a trip to Ferrari’s headquarters in Italy to kick the tires (figuratively of course) on this new investment...

The fund currently has an overweight exposure to US multinationals. Why is this?

The overweight in US multinational companies (MNCs) is a function of following our investment process, not a deliberate portfolio construction decision or a macro overlay. 

We look for companies that have three characteristics: earnings leadership (momentum), high quality and reasonable valuation. We also prefer large-cap stocks with good management and good ESG.

MNCs tend to tick more of these boxes than smaller-cap, purely domestic-focused stocks. For example, right now we own US MNCs like McDonalds (NYSE: MCD), Starbucks (NYSE: SBUX), Pepsi (NYSE: PEP), Otis (NYSE: OTIS) and Linde (NYSE: LIN). We own mostly multinationals in Europe too – LVMH (EPA: MC), Schneider Electric (EPA: SU) and ASML (AMS: ASML) for example. Many of the best companies in the world are, by definition, global multinationals.

Economic data has improved recently and yet, the S&P500 is on track for its worst month since the beginning of the year. How can investors make sense of this?

The S&P is down for the month of August, but year to date (YTD) it is still up 14%.

At this point in the cycle, there is some risk that good news is bad news in that stronger macro data might mean the hiking cycle is not over. 

Many US and European companies reported 2Q earnings in August so stock specifics were more important drivers than the macro data.

What’s one thing you believe the rest of the market is missing today?

In the midst of the current AI frenzy, the market is overlooking the fact that the biggest long-term beneficiaries of AI are possibly going to be outside the technology sector. We are doing a collaborative research project with CSIRO about Responsible AI and have engaged with over 30 companies across sectors and geographies. The feedback has been very informative. Over time, AI will boost efficiency, enable companies to cut costs and improve profitability in a transformational way across sectors such as financials, industrials, consumer and health care. AI is not just about Nvidia (NYSE: NVDA). 

Are there any podcasts, movies or shows that have caught your attention recently?

I’ve recently watched two movies about well-known companies, BlackBerry and Air. They have totally opposite endings. The former is about the rise and demise of BlackBerry and serves as an important reminder about the perils of technological complacency.

Air is the story of how Air Jordans came to be and how the product fundamentally changed the relationship between professional athletes and their sponsors. Ben Affleck’s portrayal of Nike CEO Phil Knight in the 1980s is hilarious. The movie reinforced my view about the power and longevity of winning global brands like Nike. After all, Nike is named after the winged goddess of victory!  

Livewire Live 2023 is fast approaching 

Mary will be joining 17 of Australia's finest investment experts on September 12th on the stage of Livewire Live. Tickets are now sold out. We look forward to seeing many of you there. If you missed out, you can join the waitlist here.