Kyota, and welcome to this episode of Sheered Lunch. Today we are posing the question on a lot of people's minds right now, why should we bother investing locally when all of the action and all the investment returns seem to be going on in the United States. I'm Dan Brounskill from Interest dot cot in ZID and I'm joined to discuss this with Chris Deliver, head of Global and multi asset Investments at Harbor Asset Management.
Investing involves risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest. Everything you're about to see and hear is current at the time of recording.
Thank you for joining us.
Thanks jan Ah.
So.
I guess looking at the United States stock market, it has gone up a lot, while our market in the Australian market and lots of other markets around the world have not gone up anything like so much. Is this sustainable? What's going on? Help us understand?
So a question we get often is why is a US market done so well? And why he has New Zealand been left behind? And it's probably going to sound quite predictable, but the answer is rarely around technology. So we've seen a lot of capital expenditure in AI that has driven a really large part of the gain for the US stock market. In addition to that, there's also
been really strong economic growth in the US. If you look back to the end of twenty twenty two, the consensus was saying that we're going to get a recession in the US in twenty twenty three. Just a few days ago, there was a fund manager survey released and not many people think there is going to be a recession. So there's been a big change in the consensus over the last eighteen months and that has really helped drive sheer markets forward.
When you look around the world right now, I mean there's a lot of negative sentiment economics New Zealand particularly. Do you think the US stock market is doing unusually well or other markets doing unusually badly? Talk to me about that.
Yeah. So, although the US is the market that's had most of the headlines so far this year, it's actually the second largest country in the world that's actually done better. So the second largest country in the index is actually Japan. But actually so far this year, Japan has actually delivered a higher return than the US stock market. But you hear a lot about the US because it's the way the US stock market has generated its performance that has
been quite odd. So up until last Friday, a third of the returns were driven by one stock, and we all know the name. It's in Video, probably the ultimate AI play. Given every dollar that gets spent towards some of it will find its way to buying in video GPUs.
This is because in Vidio not itself an AI company, but makes the chips that power AI.
Yeah, they're the infrastructure play I suppose with regards to AI. So they're benefiting from the capital expenditure that lots of large companies in the US are doing right now. I know that Mark Zuckerberg has said this in the past, is they're investing in AI partly to protect their current revenues and the money they're spending today. They don't expect to see returns on that capital investment for at least
a few years from today. So there's been a lot of investment in as I said, capital expenditure, which is investing in supply. We've got to wait and see the next few years whether the demand is as good as everyone expects, and I think that is going to be the interesting thing for AI. It's over the next few years when we find out whether those use cases which seem promising are actually going to translate into real revenues and real margins for businesses. But certainly AI it's been
a real story. It has created real earnings. I think that's important. So in Vidia's share price, yes, it's gone through the roof, but their earnings have gone up multiples of where they were expected to be. So consensus earnings were way off a couple of years ago, and that has since been upgraded. But the key thing we've got to figure out is are these earnings going to be
sustainable for the future. And no one knows, not even the leaders of these really large companies are able to tell you exactly the use cases and exactly what the demand be in the future.
A few weeks ago, we did an episode on the weight loss drugs. That's another big trend like AI. How much is that affecting stock market returns in the US and elsewhere.
Yes, it has been a driver. The key plays here have been Eli, Lilly and Novo Nordis as a theme hasn't contributed anywhere near as much to return. So when I look at Novo Nordisk and Eli Lilly together, they've contributed about five percent of the return for the MSCI World Index this year. That's pretty small when you consider that Nvidia has alone generated five to six times the
contribution to return. But where the weight loss drugs are really interesting is the impact that they're having on other companies, and we're actually seeing it this side of the world. So recently ResMed, for example, sold off because it was deemed that these weight loss drugs are not just helping people lose weight, it's how helping them sleep better and
treat their sleep at near as well. So the interesting part we see on that is yes, the first order effects on those companies, but the impact has actually spanned far greater to companies listed locally here like Fisher and pikeal Healthcare. I'd include in that as well, all the way through to airlines because we're all going to be slimmer and that's going to mean less jet fuel. So I look forward to that.
I can't wait for them to see if they can make the seeds even narrower.
Yeah, so how.
Much of if you look at how the US market has gone up quite a lot more than New Zealand or Australian market. How much of that is due to AI or even in video alone.
So I think there's two key things to think about with share markets. One is the sectoral composition. So you know how much in tech, how much in consumer discretionary? The Amazon is classified as a consumer discretionary company. In most people's minds, it's it's probably tech because a lot of their earnings come from Amazon Web services as opposed to the marketplace. But that's how it's classified. So tech
kind of permeates every sector. But notwithstanding that, you look at say the US compared to the New Zealand and Australian market, and you've just got to look through the top ten to see that it's a radically different beast and that has been a massive headwind for our market. But that brings me on to the second point. So one is sectoral composition has something to do with it.
The second part is the economy. Now there's that old saying the stock market is the economy or is not the economy in New Zealand's case, so people in the US tend to say, oh, the stock market is the economy because there are a lot of listed companies over there which are a world avest fight across the US and capture America Inc. Quite well. They capture the innovation and a lot of the things driving gd growth and GDP growth in the US. In Australia it's quite similar, right.
You know, we've got big banks over there, We've got we know that commodities is a large part of their economy. When you look through their share markets you see that quite well represented. Now that brings me to the New Zealand economy. Look through the top ten names in our market and it isn't the economy at all. You know, for example, Fisher and Pikele Healthcare great key we name given it that came out of Fisher and Pikele appliances, which I'd say most people have got one of them
in their kitchen. But it's revenue really is generated all offshore. So that's not a New Zealand Inc. Investment.
The New Zealand economy slows Fisher and pike wll barely.
Notices correct, But where it does have an impact is around sentiment towards a market. So even though our stock market isn't our economy. If there's bad headlines around New Zealand and our economic growth and we have been slowing quicker than particularly the US, it is another reason for
an investor to not come into our market. And we have noticed over the past few years that we've had less interest from Australian investors in our market, and that's captured by statistics, and part of that is that the banks have been doing quite well. Right, So when you look at the Australian Index, if you're an Australian fund manager and you don't like the banks, it's really inconvenient
because there's such a large part of the index. So what a lot of Australian managers were doing through to kind of twenty twenty was building some reasonably large positions in New Zealand companies. But as it happened, you know, the banks' actually done extremely well over the past few years, so they haven't had as much reason to come into New Zealand. In New Zealand since our market has underperformed so substantially, there's no fomo there either. You know, they're
not missing out on anything. They look at the market and go Actually it was greater was in in New Zealand, so the Australian market has done better. So the economy does matter here, but less so than the US and Australia.
Because if you look, there's a couple of companies in the top five Meridian Energy, Spark New Zealand and New Zealands INDECKS. Those are ones that are probably tied to economic performance to a certain degree, or at least economic growth. But as you say, Fisher and Pical Healthcare, Auckland Airport not so much in fratil global investment business, so not actually that tightly and that makes up forty three percent of the index those five companies, so not super tightly
tied to New Zealand economy. But you say that the downturn is turning people off anyway, people still not.
Yeah, that's right. And I think the other thing we've got to take into account is a lot of our companies were quite impacted by COVID, so you know, quite simply, and this doesn't really hold over the short term, but over the long term. Share markets tend to track earnings, so if you've got earnings growth, that is a good reason for your share market to go up, right, And
we just haven't had the earnings growth. In New Zealand, we've had a lot of our larger companies impacted by COVID and they've been finding their new equilibrium earnings level. So look at for example, Fish and Pipel Healthcare. COVID led to a lot of demand for their consumables, so they had their earnings increase quite substantially. But as the world normalize, what our analysts have been trying to figure out is what is what is the new equilibrium equilibrium?
Why do I say these long words earnings for Fisher and Parker Healthcare, you can say a rarely similar thing for a two milk the dig or suitcase traveler just completely dried up during COVID, So after COVID you're wondering what sort of businesses business emerges are from this disruption. Main Freight as well. If you look at Main Freight's earnings chart, massive COVID earnings and now to us it looks like it's got back to it's pre COVID earnings growth.
So you know you had that massive, massive increase back down. These are big companies, they haven't impact on the index and looks something I get asked often, and this has been a recurring question over the past few years is when is New Zealand going to catch up? And I still can't answer it, not much used to anyone, But what I will say is it does feel like we're getting back to our baselime level of earnings. So we've been quite bearish on New Zealand relative to global assets
over the past twenty four months especially. Our next move might actually be to close some of that underweight to New Zealand. And there's two reasons for that. One is that valuations relative to global share markets are actually a lot more attractive today than they were a couple of years ago. And secondly, we feel like we've got a lot more faith in what the earnings picture is are going forward.
Yeah, because I think it's basically if you look pre COVID to today, the index is almost flat. I mean, depending on the day, it might be up one percent or two percent. You think, surely that can't last.
Yeah, I mean, but I always tell people that, you know, be careful with time frames because you know that's true. So I think to the end of twenty nineteen to today, we're pretty much flat and the US market's up like seventy percent, So it's been a massive drain and you look at it and go, what am I doing here? Why am I being? And I think there's good reasons though too, and just on the performance basis, So the two decades to twenty twenty, we outperformed the US market
quite substantially. So from twenty ten to twenty twenty, the indices were pretty much on par, but the US from two thousand to twenty and ten was flat because we had two crises, one to do with tech, the other was obviously the global financial crisis. And that's a good thing about New Zealand. We just our companies weren't impacted
as much. We hummed away and actually we delivered the level of outperformance which is similar to what the US has delivered relative to US over over the past four years that we've just talked about.
So yeah, so that's why we talk about this whole You've got to have a long term horizon and you've got to be prepared for losses because I mean, some of us are you know, younger investors who definitely haven't been around for any ten year cycle a littleone multiple. But it's interesting to hear that like this idea because to me, three years of flat gains feels like my investing lifetime. It's interesting to hear that there was a time where there was ten years in the States.
But there can be some very very long winters. So we're talking about Japan this year, right, because the Japanese stock market has done really well. The problem with the Japanese sheer market all time high is the high that they hit this year was a relative to nineteen eighty nine. Okay, all right, so it's thirty five years in other words, of a zero nominal return. You know, we're not even
talking about talking about kind of really justable. Look, I'm not going to draw that analogue to today in the US. The valuations in Japan were just just absolutely unheard of and they haven't really been tested since on a price to earnings multiple basis. The only thing close was the was the tech level in the US. But it's just a really good example of conventional wisdom back then was you know, Japan was the future and it didn't transpire.
Interesting with Japan today it does look like and a key reason their market is rarely is one there's reforms around shareholder returns. So you know, Japanese companies were quite benevolent and you know, really took great care of their employees, which is a good thing. But would enter we do expenditure with the expectations of really low returns on capital.
So if Japan is being a little bit less benevolent, is the reason the US economy and therefore it's share market to a certain degree, is our performing because the US is not so malevolent. Perhaps they're better capitalists, perhaps more malevolent. You might even say.
There is some truth in that. If you look at the share of a company's profit that goes to labor versus what goes to the shareholders, and that is over the past couple of decades in the US fallen, so so a bigger share of the gains have gone to capital over labor. More nearer term. What's quite interesting is that some of the larger companies in the US, you'll probably say they weren't great capitalists. And I'm talking specifically
about some of the large tech companies. So you're going into the say two, they had a decade of just rarely really check money. Easy to get around a way with regards to raising capital, and money was cheap, right, you know, we had intrastructs pretty much zero, and that meant that actually there was a lot of fat in those businesses, right, you know, think of Meta, think of why it's called Meta because they were chucking so much money into the metaverse and it wasn't exactly delivering any
shareholder returns. So actually part of the gains that you've seen in the US share market, I think, particularly in twenty twenty three in twenty twenty four, has actually them been better capitalists. So I will use Meta as an example again because they managed to gain deliver strong profits while reducing their workforce.
So I feel like we've highlighted two main things that explain the difference between the New Zealand Australian markets and the Japanese and US markets, which is largely tech exposure AI better economy performance. How would you split those two things?
You know?
The you know, is it is it fifty to fifty or is it more tech driving the returns or is it more the better economy? Do you have an idea of which of those two things are having a bigger impact.
I guess it's definitely the composition of an index which has the line's share of the impact in my view. And the reason I say that is because we do a lot of analysis where we adjust share markets to have the same composition interest as the US and see how much of returns it that actually explains. So it
does explain a really large portion. So for example, if Europe had more in information technology, just the same information technology companies they have today, their share market return would be higher because their information's technology sector is actually done quite well, but they just haven't had as much of it as the US. So that definitely is the lines share and so some of it sector. Some of it
comes down to style as well. So you know, growth investing has done quite well for a number of years, particularly though kind of over the past twelve to eighteen months now when you look at a lot of the companies within New Zealand, for example, you wouldn't call them traditional growth.
So, Chris, when retail investors are thinking about their own personal finance, what approach could they take to factor in some of these things? What things should they be thinking about?
I guess yeah, So I think a key one is just making sure that you haven't had risk creep in your portfolio. So lots of things have gone up since you've probably bought them, and what that means is that actually the portfolio that you bought might be quite different than the portfolio that you have today. For example, if you you've gotten video in your portfolio, it has it a guest say, it's probably a bigger weight today than
it was when you originally purchased it. So have a look at your strategy and make sure that it reflects your risk profile today as opposed to your risk profile that markets have just given to you. That would be my key tip. The other tip is something that people ignore in portfolios is the impact of currency. So a lot of people might just be invested in the US. Is that hedged i e. Have you invested in a
product that hedges out the currency risks? So if the New Zealand dollar depreciates or appreciates, it won't impact your return or are you an unhedged investor? A lot of people given especially if they're buying shares directly, they would have a lot of unhedged stocks.
So if you think about the markets we've talked about today, New Zealand maybe doing the worst of the Setustralia a little bit better, US and Japan doing really great. What should people be doing? But you know, is it good to be spread across all those markets, or do you want to focus on the ones that have done the worst? How should people approach that?
Yes, so I definitely wouldn't although it's tempting to try and catch the bottom and catching falling knives is really really difficult and as you could imagine, pretty fraught. But I think, as I demonstrated earlier, there are different time periods where different markets outperform and underperform one another. And I think the very I get a lot of information by the questions that people ask me, And a really common question is why do I even need to be
investing in New Zealand. Typically when you're asking that question, it's because of performance, and typically that is the time where actually maybe you should consider investing in New Zealand. As I said, there's recent decades where the New Zealand market has done really well a relative to the US
market and Australia in particular. So yeah, I think in MIX and H market there are different drivers for each And you know, today so much of the world index is invested in the US, so you're getting really good exposure to the US market.
Anyway, Harve has just done some interesting research looking at basically portfolio allocation, and it seemed like from my reading of the note, that you're essentially arguing that institutional investors like you should not just be investing in different markets, but actually investing in different kinds of assets, and that the stock market might have law returns relative to potentially bonds, and that you should actually invest in a slightly broader
range of assets. Can you talk just briefly and in simple terms about what that research shows and why you're thinking about maybe changing up the way you look at your portfolios.
Yes. So, there aren't many relationships in finance that actually stand the test of time, but one that does is your starting valuation of when you invest in a market and the return that you get over the next decade. Because say you're buying a company with a price to
earnings ratio of twenty times. Essentially, what that is telling you is for every one hundred dollars you put in a company, they're going to kind of give you five percent or five dollars back in earnings each year, right, and if it's a growth company, they'll be able to grow and deliver more returns to shareholders. Five percent not a lot, not a lot, And when we look at bond markets at the moment, and you know, bonds are boring. You know a lot of people don't like to talk about them.
How to buy them, Well, that.
Is a challenge and we can talk about that. But bonds actually are quite interesting as a compliment to a portfolio right now, and that's for a couple of reasons. One, they're delivering a pretty healthy yield. So you get an investment grade bond in New Zealand or investment grade bond fund, it's probably going to have a yield of around six percent, right and it just gives you that protection should we get a growth shock. And lots of economists at the
moment are not for seeing a growth shock. But you don't foresee a shock. That's what makes it a shock. So it's good to have some insurance in portfolios. At the moment. Bonds are harder to access. I think you're right there. There's obviously ETFs around that can give clients exposure. I think the other thing to take into account, and we've talked about the US market a lot today, but there is this kind of human fomo that goes on
when a market is going really well. But it's a really good time is to look at their portfolios and actually look through and say, how diversified am I?
Now?
If you're buying the S and P five hundred today, it's twenty five percent in those mega cat tech names. And we've just had a period where those megacat tech names have driven the market up. When we manage our portfolios, we do a lot of what if analysis. Some people call it catastrophizing, but you look through and you say, Okay, if this happens, how would our portfolio react. Quite an interesting scenario at the moment is thinking about going through
the opposite of what we've just been through. Now, what if, how does your portfolio perform? We're over the next twelve months, the average stock does really well, but the market overall doesn't. And that can happen. We've actually seen it over the past few days. Some of the large tech names have had a massive breather. The markets kind of close pretty close to zero, but actually eighty of the marketers up. It's just that those larger names have really kind of dragged things down.
I think I read a stat even that the average S and P stock was something like ten percent behind the index because so few of them had driven so much of the gain.
Yeah, that's right, and so that that is the risk scenario here that if we do get a soft economic landing, people will feel a little bit more confident to go into some of the areas of the market that have
been ignored so far. I think the other dynamic is that there has been money chasing this trend, and to buy something, you usually have to sell something, right, So, for example, a lot of software companies have been struggling over the past month or so, and a lot of the rationale that we hear behind that is they're essentially the collateral damage for when someone wants to go in and buy one of the buy one of the big
tech names. And the other reason that investors tend to be releasing those names is they're worried about the impact that AI could have on some of their software sales.
Chris, thanks so much for coming on the show. We loved having you. Thank for your insights, and big thanks to everyone for tuning in. You can watch this on YouTube, or you can follow the podcast on Apple, Spotify or wherever else you get your podcasts. And please do leave us a rating, as it really helps other people find the show. Enjoy the rest of your week,