Though early days, the market has been extremely fast in labelling winners and losers.
We agree with Bill Gates’ comment that people often overestimate the impact of short-term change while underestimating long-term effects. This technology should not be any different.
We prefer to remain on the sidelines of industries labelled "disruptor", such as call-centres, but we are intrigued by valuations that are arguably already pricing-in a doomsday scenario.
We are more constructive on information and analytics companies that in the days of print were just known as "publishers".
Sceptical investors are, in our view, mistakenly labelling some of these firms as simple aggregators of publicly available content and therefore ripe for disruption.
While public data is indeed more readily usable by large language models (LLM), our view remains that adding high-quality proprietary data to public data will make a profound difference.
Such firms are already experts at leveraging gigantic swaths of highly curated proprietary data, often already employing AI. LLMs should add another tool to their toolbox.
Seizing energy transition opportunities
As investors, we continue to see the energy transition as a secular theme with huge growth potential, and in some respects as important as the internet revolution – industries are experiencing structural changes that will determine their ability to navigate risks and opportunities in a carbon-neutral economy.
What is interesting in the current economic down-cycle is that the majority of the best energy transition opportunities are often in cyclical firms active in capital goods, electrification, the chemical industry or in building and construction.
While it usually makes sense to buy cyclicals when economies slow, this is even more true for companies whose growth profile is set to meaningfully change, with probably less volatility and faster growth.
Prioritising long-term perspectives
Recession fears have receded rather than disappeared. A few tail risks remain, including Chinese demand and US commercial real estate.
With the market already pricing an improvement in business sentiment, investors’ risk/reward is not as good as a few months ago.
Until these risks clear, investors may stay on the sidelines, since as long as corporate bonds offer mid-to-high single-digit yields no one feels they are missing out on equity markets.
But market timing remains a game we are reluctant to play. Instead, we focus on understanding the businesses we own, avoiding short-termism, remaining humble and refraining from precise market forecasts.
As American economist Edgar Fiedler once said: “If you have to forecast, forecast often.”
Ludovic Labal is portfolio manager of the Strategic Europe Quality Fund at Eric Sturdza Investments
