Ausbiz: Top tech stocks and emerging markets to watch this earnings season

Let's get across all those macro moves and now it's influencing markets with a focus on the state.

Sam Ruiz joining us from T. Rowe Price.

Sam, good to see you, Andrew.

Well, to consider at the moment, there's plenty with one week to go until the election.

I'll get to that in just a moment.

More broadly though, and you just sort of sum this up with three thematics, if you like, that have been important for markets this year.

Obviously the rate cutting cycle now underway, perhaps the Fed having engineered the soft landing, therefore the economy and also AI.

Now, of course, we're in the midst of earnings season, big week this week with some key big tech results.

What are you seeing there?

What are your expectations?

Yeah, I think, I mean, it's going to be very telling.

And what I'd say with some of these results coming through is it's where the bar of expectations are.

And we've actually had over the last quarter or two companies actually report very decent numbers in an absolute sense, but not meet the high bar investors have had and actually fall on not just profit beats, but even increases to guidance.

So I think we'll be looking at where expectations lie for some of these companies is very much for the tech group of companies, which I think is what you're alluding to this MAG 7 mega cap tech space.

I think we'll be very much looking for whether they're getting more investment from their customer base in what they're doing in the AI cloud.

Because a lot of the investment and the CapEx they've been spending, which has benefited NVIDIA and the data centre build outs.

And you've probably seen even how they've had to go contract out some of these nuclear power generators to even power them.

There's a lot of water to go onto the bridge yet where investors need to see that the return on that investment that the customers willing to pay for that investment is actually coming through.

So I think that'll be in really big focus, particularly for the hyper scalers that are in that group.

And then Alphabet, I think he said it comes out after the bill.

I think a really big thing that will matter for that company is, is the market share still sustaining that in core search because there is this bare narrative around their potential disruption from some of the large language models for, for the core business they have.

What are your favorite stocks among MAG 7?

Very good question.

And these have moved around somewhat.

Right now we favour Meta, Amazon, two of the that are really out there.

Why?

Amazon just generally has a very good business.

It's got 3 core units that are all firing pretty well.

That's advertising retail.

You've got the cloud business as well.

But Meta, I'd say we've already talked about what's in focus this earning season and the very big sort of headline term everyone uses ROI or return investment of the AI spent.

Meta is the only one of that group that we can see is tangibly benefiting from their investment in AI.

So it's interesting, isn't it?

Because rolled back about a year ago or so, the market was hugely concerned about that huge spend it was having on AI, but it now appears to be paying off.

Yeah.

So I think that's partly because the huge spend on AI was focused on this thing called the metaverse.

If that metaverse strategy was already taking off, I probably wouldn't be here and we'd have goggles on doing this as avatars or something like that.

And, and there's a laugh that that effectively grabs, but that's how investors felt as well.

This feels like a bit of a pipe dream and how it's actually going to pay for itself.

Whereas they've actually been able to pivot all of the capacity they've built in AI now into much better models for how they recommend advertising and convert customers through social media.

So if you think about rolling back 12-18 months ago, they cut 27% of their workforce and their headcount.

You have actually been able to sustain higher growth in terms of their advertising spend and the customers willing to advertise and their platforms.

That is.

And I think this is really worth spending another 15 seconds on.

That is despite Apple turning off a unique identifier in people's phones that allows them to track you.

So they've had to build an AI that basically goes and figures out what they were getting from Apple and build it back themselves.

And that's been incredibly successful for them.

I didn't mention NVIDIA, by the way, which I think is OK.

Yeah.

Well, So what do you think of it, NVIDIA?

So, so NVIDIA, we've actually been reducing our exposure over recent months because we are concerned that that CapEx that's been spent, it's almost like an arms race to buy as many GPS as you can that we're actually going to start to see that decelerate.

So that means that NVIDIA can still grow earnings, but the percentage growth rates that were extreme, the company's grown its EPS earnings per share by close to 800% since generative AI came out.

We just think that the the year of year growth rates are coming down and that leaves the stock a bit more vulnerable when it comes to its multiple and more competition coming out in terms as well, perhaps more realistic growth then because it has obviously managed to exceed expectations every every stop, Sam.

So I mentioned there at the top, obviously the easing rate cycle is, is under way in the states, looks as though the Fed is engineered the soft landing on that basis.

And we talk about the MAG 7.

Do you see that that that sort of breadth now in in the market continuing as far as beyond the MAG 7 where you actually see that growth?

Yeah, it is a great question.

I think it's the perfect question to ask right now in this market.

When you look at this Magnificent 7 we all knew about, they outperformed the market.

The all country would index by about 110% from the generative AI sort of invention all the way to the 10th of July this year.

Why 10th of July?

Because we had ACPI print that really changed the market's expectation for rate cuts in inflation.

Since the 10th of July, they've underperformed by around 10% and we've seen the rest of the market not just have expectations for earnings increase, but actually in a relative sense outperformed that group of stocks.

Why is that?

I think people are more betting on this steepening yield curve.

Basically, we're going to get this Immaculate soft landing of short end rates coming down, but long end rates staying a bit higher, which signals a stronger economy.

And that just means that there's segments of the market where people have constantly been questioning, is there a recession?

Is there a session?

Is it hard landing, soft landing?

Now it's even like no landing soft landing.

So we see areas of the market that people haven't wanted to touch as much.

Some pockets of financials where credit have been under people's watch list a little bit more, even aerials in in industrials that could benefit from not just near shoring, but a pickup in activity in in the industrial sector of the US areas.

We're thinking about being contrarian at the moment.

How are you feeling about emerging markets at the moment?

So emerging markets are a particular bright spot as well.

Emerging markets have been under this cloud of China weakness, but also a high U.S.

dollar and high relative US interest rates puts really big pressure on emerging markets.

People don't want to put their money there typically if they think the currencies will be weak and those economies struggle when their rates basically have to be lifted to match the US.

So we actually have been adding to some of the more demographically advantage countries in emerging markets like Vietnam, Indonesia, Philippines, even India is one that we favour still attracting foreign direct investments, still have the cheap labour force.

But where the overall sentiment for emerging markets for a part of the world that's still growing at a healthy premium will start to improve because of this dynamic with rate cuts in the US and the US dollar probably weakening on the back of that.

And Sam, the US election, have you taken a position ahead of the election or do you think it's wise to weights look at the outcome and then act?

Yeah, I don't have anything too sexy or exciting to you on that.

I think it's a fool's game.

We do generally in trying to think about what that means in the election, regardless of the outcome.

You know, there's a talk of contested elections and obviously there's a lot of Ward's gone to the bridge until January as well.

What I would say is we're trying to build a very balanced portfolio that isn't really taking a strong foot in either camp.

What we do expect though is contrary to something I heard you read at the beginning here, we do expect a divided Congress.

So we do think Republicans take the Senate.

We do think that the Democrats take the House.

And effectively that limits the ability for either party to legislate, which is a bit more status quo for investors, which means that we now have this backdrop where we think we've got the economic soft landing.

And particularly if Kamala wins, then we think we've got the political soft landing.

The one thing I'd just say there is if Trump does win, even with effectively a split between the Senate and the House, is he is potentially still able to enact the widespread tariffs, which is something investors will very quickly think about.

And it's also part of that emerging markets discussion we had before.

You do need to think about which countries might have a big impact from some of those tariffs.