Ep 128: AI, Equities and the Q3 Investment Outlook - Peter Armitage & Nolan Wapenaar

Michael Avery (0:00)

Welcome to The Monocle Banking Podcast. As always, curated by Monocle Solutions, I'm your host, Michael Avery. And this week, we're asking, where is the money going to be made in the third quarter?

Well, as we know, markets have been in a particularly mischievous mood this year. A war in the Middle East, oil briefly behaving as though the world was running out of it, inflation returning from the dead, central bankers changing their minds, or at least investors changing their minds about what central bankers might do, and enough anxiety around AI to sustain several technology bubbles all at once. So you might reasonably have assumed that the sensible response would have been to hide under the desk with the money market fund. The trouble is, the markets don't operate like that at all and didn't cooperate. We saw the S&P 500 kept pushing higher. We saw the ranch strengthen. South African government bonds rallied. Banks on the JSC had a rather good quarter. And I think investors who waited for the world to calm down again and become a bit more coherent and investible, probably still waiting for that. So it's time to find out where the money is going to be made in the third quarter. And Anchor has just released their latest report, which makes for fascinating reading. Joining me are Anchor Capital Chief Investment Officers, Peter Armitage and Nolan Wapenaar.

Gents, welcome. Peter, let's just begin with the apparent contradiction at the center of your outlook. The geopolitical risk remains unusually high, yet Anchor has become more willing to take on investment risk. So what has changed sufficiently to justify that move?

Peter Armitage (1:47)

I think everyone needs to separate out from a global and local perspective. Obviously, a lot of what happens locally is informed by offshore. But globally, you've got two kind of competing forces from an evaluation and performance perspective. One is the risks, which are largely censored around the war, oil and the transmission of higher oil prices into inflation, means bond yields have gone up, which should theoretically generally have a time that reduces equity valuations. So you've got that on the bare side.

On the positive side, you've got unprecedented investment in technology in a changing world. And that has trumped, sorry to use the phrase, the Iran war issues. And ultimately people invest in businesses because they think the value of businesses will go up and people don't want to be left out of that trade. So if you brought that back home, picture having 20 power stations being built in South Africa at the same time. The implications on reconstruction and retail spend, on the whole infrastructure around that. And that's keeping the US economy very buoyant, and keeping the market buoyant. And hence people are looking at the whole Iran war issue. They're kind of looking through it and saying that will end, and this is not a permanent mechanism. In valuation, they've come off 10% from their highs in the US. Locally, it's a little bit different in that you've had the markets down 5% for the year. So things haven't on a materially worse than pre-war. The SA story continues to get a bit better.

But we've got shares at 5, 6, 7, 8 P multiples. In America, you have to pay 25 for the same thing.

So we've got a double digit expectation from local and global equities. And we obviously think you should diversify, but if you had to choose one in the next 12 months, we think you could well get a better return out of local equities.

Michael Avery (3:43)

That's really interesting, and we'll come back to that.

I want to kick off with probably the big talking point in markets. Let's park the geopolitics of the Middle East to one side for a moment and talk about AI and this investment cycle, which is being described by so many as structural rather than cyclical. Maybe Nolan to bring you in on this point. What evidence would tell you that this is a genuine productive investment rather than the familiar corporate tendency to overbuild whatever is currently fashionable? Because there are such eye-wateringly large sums in terms of CAPEX that are being spent as Peter mentioned. Imagine 20 power stations being built. I mean, that's effectively what these data centers are. There is a sense that all these mega CAPTEC companies are investing because they have to. There's this fear of losing out and being left behind. But that has also led to questions of this being a bubble, and there's lots of circular funding in the whole ecosystem as well. So how do you, as managers of capital, try and sort the wheat from the chaff in the AI space?