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Why this market feels different · UBS Trending

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  A small group of
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  companies continues to drive an outsized share of market returns.
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  But concentration alone does not tell the full story.
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  What makes this market different?
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  How can investors build portfolios that endure?
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  And where could the next wave of AI driven opportunities emerge?
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  Well, we're going to break that all down for you right now on UBS
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  trending.
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  Hi, everyone,
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  and welcome to another episode of UBS Trending I'm Anthony Pastore.
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  Great to be with you today.
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  Very excited to welcome to the show
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  Martin Romo, Chair and CIO from Capital Group.
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  Great partners of UBS.
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  Martin, thank you for joining us
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  and good to have you on the show today and today.
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  I'm really excited to be here. Thank you. Great.
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  And by the way, to our audience,
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  Martin is also a member of the UBS Research Advisory Board.
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  It's a group of experienced market leaders and industry
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  experts who collaborate
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  with UBS as Chief Investment Office to explore the key
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  themes that are driving the markets,
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  the economy and of course, long-term investing.
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  Lots of the topics that we talk about here on this show,
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  their perspectives
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  help broaden
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  the conversation around today's most important investment topics
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  and bring valuable insight to UBS clients and advisors.
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  So Martin, again,
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  thanks for being on the research advisory board.
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  We're so happy to have you.
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  You know, today we're really looking at a market
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  where we're continuing to make all time highs and equity markets.
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  Obviously we're paying close attention.
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  What's happening to bonds as yields continue to make multi-decade
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  highs?
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  It's just a wild market to be kind of a part of and talk about.
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  But I want to kind of get to the idea of market concentration
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  because there is a small percentage of stocks and companies
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  that are controlling a, a large portion, over 50% of the market.
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  So why should investors right now be paying attention to market
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  concentration, especially given all the conditions that we're
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  seeing today?
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  Well, I think it's incumbent
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  on every investor to think about our clients.
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  And it's always started.
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  Bear with us.
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  And as we think about our obligation to them,
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  yeah, we have to have great returns.
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  But at the end of the day, we're obligated
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  because they've entrusted their savings to us.
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  And what we know from history is in periods
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  of extreme concentration, like the one we're in
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  and where the market is really decided, one future will hold
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  that usually comes with both opportunity and fragility,
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  and it's exactly this time where we as active
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  managers can apply judgment, step back,
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  think about the breadth of risk,
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  and bring a risk adjusted mindset to that obligation
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  and for the savings we're entrusted with.
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  And if you look at history, you can see this chart here.
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  We've gone through different periods, whether it's the nifty 50s
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  in the 70s, Japan in the late 80s,
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  it's clearly a tech bubble,
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  we went through a global financial crisis.
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  And then now we're in an unprecedented period.
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  And it's not just those large companies.
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  I think it's important to step back and see where it's happening
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  everywhere.
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  It's a little bit like that movie a few years ago.
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  "Everything, Everywhere, All at Once."
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  So you're right, those top ten companies
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  are now over 40% of the S&P 500.
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  That's unprecedented.
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  But let's click into that a little bit more.
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  You've got semiconductors at over 20% of the S&P 500.
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  You turn and look outside.
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  The US three companies dominate the emerging markets index
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  representing almost 30% of that index.
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  And if you step away from equities
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  and you think about what's happening in the bond market
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  year-to-date, we've had more
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  issuance of $20 billion or more than we had in the prior decade.
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  At every turn.
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  And then you look at what's driving the economy in the US.
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  It's all about AI.
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  So if you step back and you reflect on that history, it's
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  not just that the concentrations in the market, it's
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  these stacked concentrations that seem significant
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  and a challenge to investors
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  who are looking to balance their risk exposures.
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  So I think it's really important in a market
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  that feels like it's hinging on a single point of failure
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  to step back and ask ourselves these questions and elevate
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  the need to think about judgment and balance
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  over the next incoming years.
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  And by the way, Martin, what you're saying from Capital Group
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  is very much echoing what
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  our Chief Investment Officer is saying here.
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  Obviously, they agree that concentration risk is high,
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  but it does warrant active management,
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  which you mentioned earlier.
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  I do want to ask you, though, because there's that cliche,
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  especially in this business where everybody says, well,
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  this time it's different, but maybe it is a little bit
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  different this time when you're looking at concentrated markets.
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  We've seen them before, as you outlined in that chart,
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  what does the underlying data today tell you?
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  It's different this time around versus maybe what we've seen
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  in past cycles.
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  But that is
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  the challenge of the day because on one hand and like UBS,
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  we have
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  we're very constructive
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  on the outlook for artificial intelligence
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  and the impact that might have,
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  not just on the companies that are at the forefront,
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  but broadly for economies and companies
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  and industries around the world.
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  So we can cite these periods of market concentration.
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  But we've done some work
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  and we've tapped into some experience,
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  and in fact, some of my own
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  bringing together folks who were analysts with our economic team
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  to look back and say,
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  is there something more fundamental going on?
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  Is there a different period we can think of?
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  And it's the first period,
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  the first decade of this century, in fact, that ten year period
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  where China was making huge investments, fixed investments
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  in their economy across housing, industry,
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  and it really started to create a model for us.
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  And you can see the map here that maybe were very early
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  on what is likely to be a structural change
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  across many industries and around the world.
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  So if you mark this, we started in 2001
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  through 2010 that China expansion.
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  If we start AI in 2022,
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  we've got another six years,
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  perhaps for this extended period of investment.
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  And just like then, we're asking questions
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  will this investment lead to economic return?
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  That's an important question
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  and certainly for the companies who are deploying capital.
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  But the other question is is this a bubble?
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  That's an industry question, but it's also a question of
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  what's the black hole
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  and what we mean by "black hole" is the pace of this investment.
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  The scale of this investment is clearly going to have
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  dramatic impacts on industries and companies that black hole.
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  And we've seen it with some of the professional services.
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  We've certainly seen it
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  with SAS companies
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  where the gravity, the weight of the investment
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  that's going in the ground is going to affect profit pools.
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  It is also going to create opportunities for other businesses.
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  And I think that's where there's a contradiction.
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  On one hand, that concentration is a concern as it relates
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  to the markets that markets and equity markets.
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  On the other hand, we really need to pay attention
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  because we think this is going
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  to have a dramatic impact on economies and on companies,
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  and we need to make sure that we're watching that space
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  and this model and this analog of China and overlaying it
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  over the pace of investment
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  with AI is one that's become quite fruitful for us to pursue.
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  Right.
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  And obviously,
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  one of the biggest conversations
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  that we've had for
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  at least this year,
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  and a lot of last year was about AI and its kind of pervasiveness
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  now into multi-industry,
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  you know, it's part of the power and energy.
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  It's part of small caps.
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  It's part of
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  you know, real estate when you're looking at hyperscalers
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  like these data centers.
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  And so, you know, when you're thinking about
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  building a portfolio for, for our clients and investors,
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  how should they be thinking
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  about building resilient portfolios, given
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  that there are a lot of uncertainties,
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  especially economically and globally, globally, we have still,
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  you know, conflicts in the Middle East with Iran,
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  Ukraine war with Russia continues.
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  There's a lot that's happening there.
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  We have a midterm election here in the U.S.
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  that, it might be contentious.
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  How do you build a resilient portfolio,
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  given all of the constraints
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  of what's going on out there in the markets?
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  It's a great question.
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  Exactly what we're focused on.
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  And I have the benefit of Capital's long history
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  and our ability to balance those risks
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  and look all around the world again, back to that obligation.
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  They talked about.
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  And I've talked about this internally around that dual mandate.
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  We've got to win. We've got to beat the markets.
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  We've got to beat our competition.
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  And our clients need absolute
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  dollars at the end of their financial journey.
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  So my role as CIO, it's what we do.
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  It's the capital system.
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  We think about using our collaborative research.
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  We've got 400 people across the asset classes all over the world.
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  We think about diverse perspectives.
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  We share the management of our funds.
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  And lastly, we think long term.
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  And so we're compensated a much longer base.
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  And that all leads us,
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  I think, to focus on where there's opportunity
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  and where the market may be missing some opportunities.
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  These discipline scenarios
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  we can bring think about different outcomes,
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  and it's a real time to validate those trends and get out of this
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  sort of either or market and into an an market.
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  So it's not to say that I don't think and we don't think
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  AI is going to have an impact.
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  It's that we're finding opportunities where the market
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  may be ignoring some good companies,
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  some well-positioned, bottlenecks where we think we can balance
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  that concentration risk, increase some of the active allocation.
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  And we're seeing it, you know, across the board.
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  So I think we're really positioned
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  well to navigate this system isn't built for easy markets.
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  It's built for markets like this.
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  And we're leaning into those advantages.
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  And that groundwork of that foundation of great research,
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  different way of thinking and stretch that time horizon
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  when the rest of the world is thinking about when.
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  Let's push out to "what?" Yeah.
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  And it's interesting as we keep looking forward,
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  and looking at these longer term opportunities,
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  and we know that AI is moving from infrastructure spending toward
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  more practical applications, productivity gains.
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  So when you're looking out at the horizon, Martin,
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  where do you see the next wave
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  of these long term opportunities emerging from AI and innovation
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  and all the conversations that we're having today
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  when it comes to this technology?
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  Well,
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  it's interesting because we really do think this is real,
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  meaningful technology that's going to help the best companies
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  get even better.
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  So leaders and organizations that are adopting this,
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  where we're seeing not only productivity
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  but really widening their competitive moats,
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  but specifically health care as an area
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  we think has profound potential to adopt this technology,
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  both in terms of productivity but in innovation.
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  We also think old economy.
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  We still think as we drive through
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  this era of infrastructure, build
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  the consequence of rebuilding and re-industrializing the US,
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  that even some of those metals, the commodities
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  that are exposed, still are quite interesting.
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  And it's a really interesting set up because you've got concerns
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  with rates going up about the economy.
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  When we think structurally we're going to be in a position
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  where there's going to continue to be good demand economically,
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  no matter when the Fed ends this cycle.
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  Whenever you know, the conflict in the Middle East eases,
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  and you see oil prices come down,
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  I think the market's going to come back
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  to some of these cyclical opportunities.
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  And then lastly, and always dividends, companies
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  that provide dividends
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  right now have been out of favor as rates has come up.
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  But we really think as you look at a risk adjusted basis,
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  guaranteeing that dividend income will serve you well long term.
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  Martin, thank you so much.
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  Great conversation.
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  So happy to be able to get some of your insights today.
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  And I know it's really valuable
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  to our financial advisors and clients and investors.
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  Thank you, Martin, for for joining us today.
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  I really appreciate the opportunity.
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  Thanks so much.
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  And I look forward to chatting in the future.
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  Yeah, we'll see you soon.
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  Martin Romo from Capital Group, thank you for joining.
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  And thank you all for sticking around
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  for this great conversation.
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  There's a lot more
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  where this came from on our website at ubs.com/views.
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  Plus you can follow us on social media or on Instagram
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  at our dedicated channel at @UBStrending
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  lots of studios content there for you.
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  You can also check out various UBS materials
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  on LinkedIn and Facebook as well.
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  And if you do have any questions about what
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  Martin and I spoke about today,
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  please make sure that you're
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  continuing this conversation with your financial advisor.
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  Until next time, I'm Anthony Pastore.
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  We wish you a great rest of your day.
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  And remember to keep your eyes on what's trending.
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  Everybody. We will see you soon.