‘Investors must pivot’ amid regime change, says strategist

Micky Jagirdar, Global Equity and Investment Director at Ariel Investments, joins Yahoo Finance Live to discuss the state of the market, rising energy costs, recession risks, inflation, investor sentiment and the outlook for risky assets.

video transcript

BRAD SMITH: Time to forget about buying the dip and start selling the rips, like our next guest. Joining us now is Ariel Investments’ Global Equity and Investments Head Micky Jagirdar. Micky, thanks for taking the time here today. You are clearly very bearish in the market despite the strong month of July. Why isn’t this the time to buy the dip?

MICKY JAGIRDAR: Well, thanks for having me, first of all. And I would just say that it is not that we are bearish in the market. It is that we are bearish regarding the investment style of the day. A regime change is underway and investors need to turn. I know they want Jerome Powell to pivot. But I think they are the ones who need to pivot, which is to move from what has worked for them for the last decade during the QE era of buying the dip to now, where the Fed has pivoted to QT, now having to sell the scam.

And more importantly, rather than trying to endorse the severity and likelihood of a recession, which, in turn, will inform how the Fed may or may not react, we think the market should instead focus on margins and market share. Why? First, when it comes to margins, the US non-financial corporate margin is at all-time record levels. It could be said that it has reached its peak.

And on every earnings call, we hear most companies talk about how they’re struggling to keep them. We have just heard the Jones report. And yes, there may be some softness there. But 10.7 million is still a very, very high figure. And one of the biggest costs: While energy costs and supply chain costs can go down and they can go up or down, labor costs actually have a lot of persistence. So there’s going to be tremendous pressure on margins, and again, in addition to the potential pressure on revenue that may arise, it may or may not come from the recession.

So from that perspective, we would prefer to focus on companies that have the ability to overcome this pressure on margins. And the only way to overcome that is to be able to have products that will be useful in businesses to deal with costs and to help consumers deal with costs, instead of being the ones that increase the cost. A very interesting example is Michelin, which is a tire company that caters to both electric vehicles and mining companies.

And we see that in both cases, the interest in electric vehicles, of course, has risen. We are given the fact that energy prices have gone up. More importantly, the commodity boom has also led miners to demand that they increase activity on what they need to spend and develop. And both are actually markets of oligopolistic competition for Michelin and where they will see their margins improve because they are higher-margin products compared to what the company has in its historical traditional markets.

And as such, regardless of what happens recession-wise or not, we think it’s best to focus on companies where margin protection is a tailwind, rather than a headwind.

JULIA HYMAN: Micky, I want to get back to your selections in a minute. But there’s something else that you said in a note that I want to pick up on, and that is that this is going to be a lost decade for US stocks, which obviously we haven’t experienced in a long time, right? And so what does that mean to you? What does a lost decade mean? Does it mean sideways?

MICKY JAGIRDAR: It means earnings are going to have a very hard time trying to grow from these high levels. You can debate whether economic growth is going to be 2%, 3% in the next two years, but what we do know is that cost pressures and margins have already peaked, in particular corporate margin is not financial has already pointed.

And again, we struggle to see how companies are going to, quote unquote, “control their costs,” when they don’t have quote unquote “economic tailwinds” that allow them to grow in their market, rather than why you have to reduce costs. In fact, one of the main reasons for this record high margin achieved since bottoming out around 5% in 2009 was mainly because companies cut costs as they enjoyed economic growth.

And the one thing I would point out is that this is very true specifically for the US So actually we would prefer investors to look at emerging markets where, while the US is possibly a little kid as to how deal with inflation, emerging markets are the fully grown responsible adult and have seen, engaged with and dealt with inflation for many years. many decades.

BRIAN SOZZI: Micky, within this lost decade for stocks, you mentioned Michelin, but what else do you like?

MICKY JAGIRDAR: One of the other companies that we also like, as I mentioned, market share is another thing that investors need to focus on as it allows them to decouple from what the macro and economic outlook supports. And Nokia is another company where, having solved a key technology problem that the company faced against its competitors, it is now poised to start gaining market share over its competitors.

And because your clients are 5G CapEx investors in the telecom industry, you don’t put a sudden pause or shut down your 5G CapEx investment just because there’s a chance of a recession. You have to put those particular base stations and towers. And so we think that Nokia, one of the best votes of confidence that we got on this front, is that the company has done a €600 million share buyback, which tells us that the company is confident that they can achieve this market share. you will earn and take advantage of it by rewarding investors.

BRIAN SOZZI: Alright, we’ll leave it there for now. Ariel Investments’ Head of Global Equity and Investing, Micky Jagirdar, nice to see you this morning. We’ll talk to you soon.


Leave a Reply

Your email address will not be published.