Perchtold on market surge: Here’s how we’re locking in profit, finding pockets of value

In this interview, Mark Perchtold, founding director of OMBA, delves into the stock market’s Bull v Bear debate, shedding light on the current dynamics. He highlights that while last year was clearly a bear market, this year has seen the ascendancy of the bull, which holds significant implications for investors. Perchtold emphasises the need for a more defensive approach, particularly after the impressive performance of certain stocks, notably Big Tech, which he accurately predicted six months ago were likely to enjoy a recovery. Furthermore, he discusses the recent surge in Artificial Intelligence stocks, drawing parallels to the dot-com boom and subsequent bust of 25 years ago. Perchtold provides valuable insights into OMBA’s current portfolio structure, highlighting its diversification and areas of overweight positioning.- Alec Hogg

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Relevant timestamps from the interview

  • 00:54 – Mark Perchtold on if we’re in a bear market or if it’s just a rally in a bear phase
  • 04:43 – On the benefits of diversification that ETF’s afford you
  • 07:15 – On the ‘Magnificent Seven’ stocks
  • 10:05 – On tech shares
  • 11:41 – On if there has there been a way to play this artificial intelligence boom 
  • 14:34 – Beginnings of AI stock boom or stock bomb
  • 17:50 – On how he’s able to go against the flow
  • 21:07 – End

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Full transcript of the interview

Alec Hogg: Mark Perchtold joins us from London. Mark, is with OMBA. A South African in London, a base which gives him a very good view on the world. And that’s what I’d love to hear from you today, because part of the world is saying equities are in a Bull market after rising 24% from the lows. Another part of the world is saying, no, this is just a rally in a bear phase. So give us your expert insights – and we will hold you to it, of course.

Mark Perchtold: Thanks, Alec. Just to clarify, you can hear from my accent I’m definitely still South African – I have the passport, a very loyal South African. The question of bull versus bear market: last year was definitely an official bear market as defined by a 20% or more fall in various equity markets around the world. So it depends on which country you look at. Not every market fell the same amount, but broadly speaking, yes, this year we’re in a Bull market because equities are rallying and I think a Bull Market is a market that’s trending upwards from Q4 last year until where we are now, we’ve been a good upward trend.  But there’s a distinction between bull and bear market versus recession. And I think the big looming question is does the world go to recession at some point, later this year or early next year. Bloomberg consensus is 65% of the market think we’re going into recession in the US, Goldman Sachs recently just revised down their expectation of recession to 25%. And there are pundits across Wall Street and in financial markets around the world who have completely opposite views on this. We’re somewhere in the middle of that. We think, you know, a recession is reasonably likely, but it’s more about the depths of the recession and how long it lasts. There is no doubt higher interest rates are going to put a squeeze on households and corporates as funding costs have risen. And that will actually be quite good for inflation and inflation will hopefully come in quicker, although it has been coming in quite nicely, certainly in the US and in many other markets too across Europe, although Europe is a bit divergence across different countries. So if inflation comes in and that gives central banks room to cut rates, and in an environment where rates are cuts, you often see a strong stock market rally. So last year priced in doom and gloom because of higher rates, doom and gloom hasn’t transpired. Employment data is good, economic data is good, PMI data is okay and the world is not in a recession and earnings from Q1 were reasonably optimistic and positive so that the dire outcomes that everyone thought would occur this yet during the course of last year haven’t materialised. And so there are those that are pushing that out to later this year or early next year. So our view would be somewhere in the camp of yes, potentially two quarters of negative GDP growth in major developed economies, but it won’t be deep and it won’t necessarily be for too long and that will keep inflation in check and by inflation in check, central banks can cut rates and the bull market can continue.

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Alec Hogg: It’s very helpful when you lay it out for us like that, because many people who aren’t like you, who aren’t spending 100% of their time looking after money and looking at markets get terribly confused. But if you can kind of see, well, recessions are not good for shares, there is a lag effect, but shares, generally speaking in the long term is going to be more of the shares going up than going down. So in other words, bear markets don’t last forever. Neither do bulls. But it’s likely because the economy around the world is growing, it’s going to be bull more than bear because economies are growing. But right now you’ve given us some very useful insights into how one should view these things. But then how do you structure yourself? How do you structure your portfolio – in particular  why I’m happy with talking is because you guys take a lot of that risk out by only investing in exchange traded funds.

Mark Perchtold: Yes. We like the benefits of diversification that that ETFs afford you. You’re inherently extremely diverse. But there’s so many different ways in which you can express a view using ETFs. There are over 8 000 in the world. Which ones you use to express a particular view is very important that one of the things we’ve been looking at in the last two weeks is the distinction between the market capitalisation, ETFs, which weight larger companies a greater weight. So if a company double the size of another it can be double the weight versus an equal weighted index, which just equally weights all the shares. The gap between the S&P 500 in the US market cap index, the normal S&P 500, it’s in one month’s it’s versus the equal weight one is showing a 7.5%, 8% differential in performance in the last 12 months, which is because large technology companies have driven a lot of the performance of the Nasdaq and the S&P 500, technology communications services, and like an Alphabet, a Meta, Nvidia, Microsoft, etc. They have driven a large portion of the index upwards because they make up a large portion of that index. And so the whole index is moved. Whereas when you look at the equal weighted one it’s not to the same extent. And so there are a number of lagging sectors and stocks in the index which are actually still exhibiting quite good value, whereas the technology ones are perhaps looking a little more richly priced following news about, firstly, decent earnings in Q1, but also the whole AI story over the last few weeks and months has certainly boosted a lot of these technology names. So we would be looking at thinking about things like changing from market cap based-ETF indices to equal weighted ones and then looking at particular sectors in particular countries and particular themes you might want to express a view on.

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Alec Hogg: So more defensive than you might have been in the past. Just if you can explain, I think they call them the Magnificent Seven, those seven stocks that have pulled up all American shares. And hence when people talk about the American stock market going up, those seven companies have been the ones who’ve done most of the running. Is that a little bit like in the past we always used to hear about the FAANGS – Facebook, Amazon, Apple, etc., that there was a little group of stocks when they go up happy days. But if you are overweight towards them when they turn, of course not so good.

Mark Perchtold: Yeah, the acronyms have changed over time, depending on the names of the companies. You know, Google became Alphabet and Facebook, which is an F, is now Meta so the naming convention of that group has changed and there have been a few new entrants in recent years, etc.. So, yes, those large cap technology and communication services companies are behemoths. You know, trillion dollar plus businesses. They’re massive and therefore they make up such a large portion of these major indices. So a lot of stock pickers would argue that you own S&P 500, you own too much of these companies are driven by these these names only. And there’s a whole lot of other dogs you get thrown into the mix when you buy that index. But the reality is there are other ways to express a view. You can own a particular sector, you can add a particular type of ETF like an equal weighted one versus a market capitalisation one. You could use what’s called smart beta or factor investing, which is a way in which these indices reconstitute their weights to stocks. So value factor, for example, with overweight stocks that exhibit low multiples, price to earnings, price to book the price to cash flow, etc.. And you’d have more of those and less of the ones that exhibit that valuation characteristics which are high a momentum factor with overweight stocks which have had good positive momentum, underweight those that have negative momentum. There are different ways in which the same normal index people would know can be reconstituted and there are ETFs on those. And so it’s not just S&P 500 or NASDAQ and that sort of thing. There are lots of nuanced ways in which you can express a view. And with 8,000 plus ETFs, we think we have an edge in doing that analysis and deep dive on the underlying holdings, how they’re weighted, etc. To reconstitute how a broad global portfolio looks versus just buying the MSCI world equity or a large index like the S&P500.

Alec Hogg: It’s a very important point you make there because I remember talking with another South African who’s based abroad, Sean Peche, who said in your BizNews portfolio, you’ve got the Vanguard value ETF. On the face of it, that means that if value stocks are doing better it would appreciate. He said you’re actually not buying value shares because the underlying stocks in that exchange traded fund are not what you think – you’re getting a lot of the tech shares actually. So it’s very, very complex. And I guess from an active manager’s perspective, your perspective, you’ve got to know exactly what is in there to make sure when you have a view the positions that you take are actually what you’re getting.

Mark Perchtold: Absolutely, and actually these Factor and Smart Beta ETFs do have some issues with them in our view because they are sector neutral quite often. So they tend to overweight the stocks within a sector that exhibit value characteristics which are often the dogs which are falling hence they’re cheaper. and you don’t necessarily want them on their way down to a lower price. And so it’s often better to express a value view through owning a value sector, perhaps a more defensive sector like Pharma or Healthcare, or Utilities, for example, where they’ve got more stable cash flows, or Consumer Staples. So there are ways in which you can still express a value orientation without owning a value factor ETF, or just picking out new stocks. There are ways in which you can express a sectoral view very easily in global markets today.

Alec Hogg: Before we find out exactly how you positioned at the moment, is there, or has there been a way to play this artificial intelligence boom? Some people in our portfolio, for instance, we’ve got Nvidia and Palantir and Microsoft, which are three big runners on the artificial intelligence. As you said earlier they’ve really run hard. They can’t keep running indefinitely. So you’ve got to be cautious about that. Are there opportunities maybe even to short an AI exchange traded fund – does something like that exist?

Mark Perchtold: There are lots of new ETF launches and even AI funds that are launching specific active managers either in the private space or public space trying to capitalise on this fantastic theme of AI. The problem with a lot of the large capitalisation tech and communication services stocks is that AI is such a small percentage of their total business, often not even revenue generating at all, but they have these units and teams and divisions doing AI. people jump onto that hype and they own the company. Now, will that become a major driver of revenue in the next two, three, four, five years? Probably not, we’re looking a decade or more out. So, expressing a view by owning the large cap names is not really a pure play expression on AI, and a lot of the ETFs that have launched on AI similarly hold all these big tech companies. And, you know, we were looking at one AI ETF, for example, that holds Spotify. I mean Spotify is a music streaming business. So, you know, why? Just because they are using some AI within the way in which they can generate playlists or whatever the story is, there’s an argument they’re AI. I mean, we can all agree they’re not an AI company. So there are lots of things to consider when you just look at an ETF. Are you getting purity of expression? And in thematics like AI, you’re very often not. So, you know, it’s something to do your homework on, but. The theme is growing, it’s very important. I think only businesses which are adopting AI to improve the way in which they operate and potentially their margin. And the earnings that pass through to shareholders are the ones to own. Not necessarily those that just do AI exclusively. All companies focused on adopting AI and implementing that well. And I think those businesses will thrive in this time process.

Alec Hogg: It’s quite reflective, drawing on what happened 25 years ago, 1997, that anything that put dot.com behind its name was then affiliated as an internet company. We saw a lot of that. And it’s clearly the guys who are farming the market are seeing artificial intelligence as a way to draw in more income. But Mark, from your perspective, given all of this, given all of this complexity, how are you guys positioned today for what’s going into the future? And I say the complexity because there’s no uniform view that it’s, we’re back in a bear bull market. Some say we still in a bear market. There’s no uniform view on artificial intelligence. Is this the early stage of the AI stock boom? Or is it going to be like a dot bomb where they’ve already had their run? How are you looking at this to take into consideration all of these moving parts?

Mark Perchtold: As pertains to AI, we’re not expressing an active view now to overweight AI. We’ve been overweight NASDAQ 100 and we’ve recently started to terminate because if you recall Q4 last year we added to the NASDAQ and we had this conversation. I said it’s very difficult to time the bottom but given the moves down, we think now’s the time to begin accumulating, which we did. And given this fantastic run we’ve seen in tech and communication services, we’ve been prudent to be moving out of some of that exposure into the equal-weighted S&P 500, as I’ve just discussed, and I think that’s one of our core locations is the US, that’s what we’re doing within the US market. Outside of the US, we’re overweight Japan, we’re overweight China. Japan has worked very well for us. China has had a pretty poor run. I think the post-COVID rebound hasn’t yet occurred, as people had expected. But the good thing is China can still cut policy rates. They’re talking to the US nicely again. There’s talk of fiscal reform. So hopefully China pans out in the next year or two. So those would be our two big Asian overweights. And then sectorally, we’ve been overweight autos in Europe, which has worked very well. but we’ve now started to shift some of that into more defensive sectors because of the economic environment being less certain and so we’ve moved to sectors like healthcare for example. So within our global portfolio we’re making changes at the sector and country level, just being thoughtful about how things have moved, what’s outperformed. I always use this cheesy line with the investment team, you know, buy low, sell high. And it’s just about having good discipline and doing it. It’s hard to buy low because when it’s low, people are terrified that there’s a reason it’s low, there’s bad news and there’s been bad news, but it’s not persistent. And similarly, when things have run very hard, there’s exuberance and greed. And human behaviour plays such an important part of the way in which we invest. It’s trying to step away from that and just look at things objectively and say, does this make sense? If I land it, if I have that, start with a blank sheet of paper, Does it make sense? And sometimes if it doesn’t make sense, it might be wrong. But people, you know, you can be wrong for a long time. But if you over a long period of time make reasonably good judgment calls, you hope that you cannot perform.

Alec Hogg: I remember very clearly towards the end of last year, the point that you made earlier about you going back into the big tech stocks and saying, well, they’ve fallen down, they might go a bit further, but this is a great opportunity. And my goodness, that has been a good call. And one that was brave at the time, because the perception amongst most people was, their day is over and there is no bottom in sight, still got a long way to go. So the point you made now about having the courage of your convictions, being able to go against the flow. How do you do that? How do you, how do you insulate yourself from the greed and fear that is all around you in the city of London and be able to still make rational decisions on investing like selling out when everybody else is buying.

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Mark Perchtold: I think it’s a combination of keeping a level head and not letting the noise around you and the headlines in the press detract from logical thinking. And so applying good fundamental principles of investing is always a sound approach, knowing what those fundamental principles are, but then applying them consistently. I mean, I remember the COVID period in particular, clients… been worried about the Great Depression and you know this is Armageddon for the planet and people are buying toilet paper and water and the shops are selling out of baked beans and it was ridiculous you know and had demand for toothpaste and toothbrushes dropped 30 40 50 percent during COVID? No. People still need a toothbrush and toothpaste so the stock price performance was overly negative given the reality of the fact that yes we’re in a lockdown there’s a slowdown no doubt But things are going to recover and there will be pent up demand that’s building. No matter what sector you looked at. So it was trying to ignore this noise and panic and just keep a level head saying ultimately there are 8 billion people on the planet. They demand goods and services. Goods and services will still move across the planet. Of course, there were supply chain issues which drove a lot of inflation. But if you take a long enough view, things just looked excessively cheap and people were overreacting. And the same does happen on the upside in certain things. So whether that’s crypto and the booming crypto and a lot of what happened and subsequently happened, or whether that’s AI, which was the tech bubble and bust, there are always people who are chasing the next hot, sexy theme. And sometimes they work, and sometimes you pick the right winner, but very often, 8 to 9 out of 10 of those businesses won’t be around. So, you know, like a Tesla versus the big German autos. You know, Tesla, in our view, is very overvalued, whereas the German autos trade much cheaper and they’re building fantastic electric vehicles. And so yes, Tesla led the charge, excuse the pun, on electric vehicles, but you’ve seen huge growth from other big auto companies in Asia and Germany. And I think, you know, you can own the theme in a different way. in perhaps a more balanced way, just thinking about is the valuation logical? Doesn’t make sense? Can they grow that fast? Are they really going to dominate for that long? Do they have IP that’s not replicable elsewhere? And so the answer is often no. And so I think that’s what we would want to look at with AI, back to the AI point. is do these companies really have an edge? Legislation could also impact their earnings. We still get to see how the legislative reform takes place over coming years related to AI. So all this AI story is one thing. And then the next thing you have an announcement from regulators in particular countries curbing AI and suddenly the earnings are gonna all crash and stocks fall. So one has to sit back and just look at what are the risks of doing this? And sometimes the hype is overdone. So it works on the upside and the downside and just. Applying a practical, logical, thought-out approach to investing is the way in which we want to do it.

Alec Hogg: Mark Perchtold is the founding director of OMBA Advisory and Investments and I’m Alec Hogg from BizNews.com.