Transcript: Signs point to end of ‘Goldilocks-like economic environment’
Jennifer Martin of T. Rowe Price says markets are normalizing after a period of low interest rates and asset appreciation
- Featuring: Jennifer O’Hara Martin
- July 4, 2023 July 3, 2023
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we get a mid-year report card from Jennifer Martin, vice president and portfolio specialist for global equities at T. Rowe Price. We talked about names she likes, emerging themes, and we started by asking about the state of U.S. equities.
Jennifer Martin (JM): I would say that if we look at year-to-date returns, markets are a little ahead of themselves. The economy and corporate earnings have been a bit better than feared so far this year. And that’s because of the low unemployment and inflation remaining above 4%. But it’s also been largely seven big stocks in the NASDAQ that have driven performance on the back of the A.I. excitement. The notion that we’re still in a sluggish economy where rates are up is still reflected in the broad average of stocks. So, our best guess is that markets are a bit ahead of themselves. The market has totally brushed off the Fed raising rates. There is a big change to go from pricing in two cuts at the end of the year to raising rates. And the market is just taking that in stride.
Trends and themes she’s watching
JM: Well, there’s probably three big themes that we’ve been talking with clients about. Inflation and rates, which is one. China and stimulus, which is two. And then A.I. development is three. So, if I think about inflation and rates in the overall economy, our base case is that inflation is sticky. We are 18 months into this Fed hike cycle and inflation is still above 4%. The big question is, can you get down to that 2% to 3% number. And that is a very different number, and we’re going to keep monitoring that. If I take our second point, China and stimulus, rumours at the very notion of some stimulus has set stocks in our portfolio — for example, [Arizona-based] Freeport-McMoRan — up double digits in a very short period of time. And so, we just need to see what happens there. A.I. development, which seems to be the hottest trending topic in markets in our portfolio, we’ve been prudently playing the secular growth outlook, and not blindly bullish. [California-based] Nvidea, it’s in a sweet spot, being very well positioned for the near-term economic A.I. benefit but it’s also expensive. [Washington-based] Microsoft looks to be a clear beneficiary of monetizing A.I. capabilities. It is also, though, fully valued at 30 times earnings. Expensive but not crazy. Cheaper names that we also are looking at from an A.I. standpoint would be [California-based] Advanced Micro Devices, [California-based] Alphabet, [Washington-based] Amazon, all with less direct near-term benefit but you don’t have to pay as much.
Names she likes
JM: We really have an eclectic mix of things. We have a company like [Florida-based] Roper Technologies and [Wisconsin-based] Fiserv. These are well positioned, growth-at-a-reasonable-price names. Roper Technologies, they’re in the industrial sector, but they are actually selling industrial software. And they sell into these niche markets. And it is an incredible business. And then Fiserv, same thing. It’s a business services company that does a lot of processing. Their end-market is banks and financials, but they do a lot of wonderful recurring revenue-type business. when you think about healthcare, we’ve got some real innovators in our portfolio. And look no further than the company [Indiana-based] Eli Lilly, which is firing on all cylinders, especially with diabetes and obesity. And they also have some good insights related to Alzheimer’s. Another name in the portfolio is [Hamburg, Germany-based] Evotec . It’s been disappointing for a period but now it’s starting to really come through and deliver on a number of things. And then in financials, we feel really good about the fundamentals in insurance. And we have some names like [New Jersey-based] Chubb and [New York-based] AIG. They’re set up very well in the medium term. And then even on the large-end standpoint, we own a name like [New York-based] JP Morgan Chase, with the shortest duration, and winning the most new business versus other banks. It’s well positioned and taking share. The net interest margin is up 50% year over year, last quarter, with an ROE of 20%. It’s almost on the inexpensive side.
And finally, what should financial advisors keep in mind as we head into the second half of the year?
JM: This is a really long-term game. Over time, well-run businesses remain very good investments. Markets have been resilient in the face of a lot of uncertainty. Yes, there’s been headwinds of slower economies and higher rates. Bonds do look more attractive than they have been in a while. We still think, though, good quality growth equities are a great way to make money over the medium term, taking, obviously, that prudent view of the market.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Jennifer Martin of T. Rowe Price. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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