Latest / ausbiz a.m / 16.10.26 Ryan McCaugherty, Sandstone Insights
Transcript
- nadine: Well, good morning to you. It is a Friday, so we've made it to the end of a week. it's the sixteenth of October twenty twenty-six. Look, yesterday we had a jobs read here that perhaps has changed the outlook for some sectors. I don't know. We'll speak with an expert in just a few moments or so. but of course, this week has been dominated not just by jobs here locally, but we had a consumer com inflation read, excuse me, in the United States, which has changed the conversation there when it comes to rates or at least the market's expectations of rate hikes coming in the United States amid persistent inflation, part of which is being brought on by the war in the Middle East. through the overnight session as well, I think it's worthwhile pointing out there was yet another night of I don't know, I guess you could say soured sentiment toward the AI trade. In particular Those companies that are forced to borrow funds when bond rates are continuing up around these multi-year, even decade long highs. So there's actually a lot to talk about today, and I'm really pleased to welcome Ryan McCarty from Sandstone Insights to the podcast. Good morning to you, Ryan. How are you? Ryan McCaugherty: Morning, good thanks. Good to be here. nadine: Good. Okay, so yeah, take your pick, right, from the themes overnight. We had a negative session for the S P five hundred and the NASDAQ, in fact quite so, but the Dow was actually stronger. And I mean, I suppose that speaks to risk appetite, right? Ryan McCaugherty: Yeah, absolutely. I think it's definitely speaks volumes to some of this sort of rotation that we've seen over the last couple of days. just given this sort of, yeah, as you mentioned, this negative AI trade. and looking investors looking for a bit of defensibility, a bit more defensive exposure. And I think, yeah, overnight, I think all eyes are gonna be on the federal chair wash at later today speaking at the IMF annual meeting, whether to see if there's a a pivot from previously we're expecting maybe a skip in rates. in October, or maybe we do get a a rate hike just on some of the hot data that we've seen on inflation over the last couple of days. And I think overnight the the PPI in particular, it came in quite hot at the headline level, nearly double expectations. I think one point three percent month on month, first consensus sitting around point six. obviously a lot of volatile items in that like energy. but even if you strip that out, it was still a fair bit above expectations. But I think importantly it's You need a read through what that means for the nadine: Yeah. Ryan McCaugherty: the PCE measure, which is I guess the the Federal Reserve's preferred measure of measuring inflation. We don't think there's too many measures that go directly into that personal consumption. So we don't think the expectations there have changed too much. And we also think that you know, Walsh is gonna be very mindful about current financial conditions and the recent wobble that we've seen in the tech space around, you know, these risks on funding from higher bond yields. And we we think that you he'll be happy to see some of the pain that we've seen in the AI sector, given that is leading to those tighter financial conditions that he's wanted to see. you know, core weave is clearly the poster child here, credit spreads widening to nearly 15%. I mean, overnight we had a little bit of relief on that. NVIDIA CEO Jensen Huang nadine: Mm. Ryan McCaugherty: was asked directly about that, saying he doesn't feel the need to backstop core weave, you know, saying that. It strength improves every day and it's actually optimistic the cost of capital is decreasing. I think the stock had a little bit of a relief rally after that, which just yeah, it goes to show there's quite a lot quite a lot happening in in markets at the moment. nadine: Yeah, so it's it it's really hard, I think, for average investors to understand, particularly when many will be feeling unnerved by what happened to Fermis last week. We saw that being expressed in some of the AI related names here yesterday. Next DC comes to mind. so does this put a whole dampener on the AI trade here locally? Ryan McCaugherty: Well, I I think, you know, you mentioned it before that stocks that have you know, that don't need to access debt and equity markets when you know the cost of capital does seem a little bit higher are likely to to outperform. And we think that those stocks which can fund their growth from free cash flow as opposed to, you know, higher debt, we think are actually in a in a really good opportunity to continue to to build our growth in this AI space. And so that's I think one of the reasons that we think that the the hyperscalers in particular in the US are really continue to see this great earnings trajectory growth and are able to fund it without needing to tap debt markets as much as some of the other smaller players. And yeah, I think next DC is in that unfortunate position where it you know isn't profitable yet on a sort of you know net profit up to tax line and has really been hit hard with the sentiment around what we're seeing with Fermist and AI build-out and particularly with funding costs. Where they are now as well. So with Next DC needing to tap the debt markets, you know, it can't fund its growth from its own profitability. We think that is why it has sold off quite dramatically, especially when you compare to Goodman Group, which is still down. But clearly that has a much larger portfolio of industrial assets, which has allowed it to fund a lot of its growth without needing to go as deep into debt and equity markets. So from our perspective, if you do want to play this data center thematic, we think Goodman. is in a much better starting position just given its its larger network, its larger ability to defund itself from cash and its other you know property assets. And so we think that's probably where we would like to be. But clearly there's you know tremendous demand in in this sector, which isn't going away. We saw TSM, so Taiwan Semiconductor report overnight where it's third quarter, it beat expectations across basically every single line. It raised its fourth quarter guidance. So everything you look for in a result and just continues to show that this tremendous demand for AI isn't slowing down and that supply, there is still a considerable gap between the demand and supply in in the space. And as humans and analysts, you we're always hardwired to be cautious and conservative because you know that's what what keeps us alive. And so we're always asking, you know, what could go wrong versus what could go right. And so we think there's still potentially some conservatism around the true actual demand and optimism around this build out which is likely to continue. so so we think that in this sort of AI space you can continue To stay long, where we do think this build-out will be longer. The AI demand will continue to outstrip supply, you know, remain long and maybe retain some hedges. You know, we are into the sort of fourth year of this AI-driven bull bull market, and there will be wobbles along the way, of course. And so we think it's important to look at some of these staples, some of these alternatives in the market. You know, we've seen in the US healthcare. has a had a massive nadine: Mm-hmm. Ryan McCaugherty: rally for being a bit more defensive, you know, Staples as well. So there's sort of two sectors we think as well in Australia are likely to outperform. You we saw Woolworths yesterday getting all-time highs, some defensive names in nadine: Yeah. Ryan McCaugherty: healthcare, et cetera, getting a bid. So nadine: Yeah, that's a couple sectors to watch today. I'm also wondering, Ryan, and thank you for that view on AI. You know, really, really useful. I'm wondering in the wake of that job statement yesterday and some wind back of expectations for interest rate hikes here, does you know, consumer retail start to look more attractive to you guys? REITs, you know, are there sort of some indications that maybe the bottom is in for some of those real interest rate sensitive, consumer sensitive sectors? Ryan McCaugherty: Yeah, they've definitely been beaten up over the last six to twelve months. And we've we've had this large rate rise cycle from the RBA. And we we think we're starting to see the signs emerge of maybe bond yields are starting to peak and start to roll over. And so maybe these stocks on a on a relative basis have potentially reached you know, reached peak peak pessimism, so to speak. you know, we look at JB HiFi, for example. it's You know, result had a little bit of a wobble, but we think that was more of a one-off supply issue. So for example, Apple, one of its largest suppliers, couldn't quite get enough of its products into that particular quarter, into the year end. we think the product cycle that we're seeing, and currently, you know, Apple launching its you know new new phones. You know, we've seen Google, Samsung all release their new flagship smartphones at a higher average selling price as well. Remember, memory costs are going up quite a lot. So we do think that JB Hi-Fi is in a great position to actually benefit from some of these higher prices, driving up overall margins for them. and maybe the where we're seeing relative value on a on a bond yield versus you know consumer discretionary sort of hit basis. We actually think JB Hi-Fi is in a pretty good position. It has started to sort of slow show the signs of a rally off the bottom. we we may need to get through, we think this Christmas period is really important for them. Think about all the the November sales into Christmas, really important time for them. So maybe we won't get an update at the AGM, which is before this peak period. but we really want to see some of those sales trends start to continue, start to show more strength. And we think they will be a bit more resilient than the market is expecting. I think that yeah, JB Hi-Fi consumer discretionary is starting to look quite attractive. We think the risk reward is there. Multiples are looking very, very cheap compared to history. yeah, and you mentioned REITs as well. You know, spoke about Goodman Group. We think stocks like Charter Hall as well are definitely trading on trough multiples, giving you a decent yield. and we think, yeah, there's probably a good place to hide as well. just given a little bit more defensiveness. If you do think that we are at sort of these peak bond yields, you know, we think those sort of sectors are where investors should start to see. You a bit of light on the other side of the the rate hiking tunnel, so to speak. nadine: Mm-hmm. All right, Ryan. So today we'll watch healthcare, we'll watch some of those defensive names, consumer staples, as you've indicated, but you've brought us right back to the beginning nicely, where we'll all be listening with baited breath to what the Fed chair Kevin Warsh has to say tonight. Look for our listeners, our viewers out there of osbiz.com.au. the key takeaway from overnight is that the PPI came in hot. And I like how Nab says this this morning, that AI is not. So the Aussie dollar is taking a big hit in the wake of that jobs data here. look, when it comes to what we're expecting locally, not a whole lot. We'll be watching obviously the commodities complex. Brent crude, though, little changed, just below 106. Per barrel. We've got the IEA pledging to release reserves that were promised back in March. there's no big Australian data today. Warsh is a big one. BOE Governor Bailey as well, and BOC Governor Macklam all delivering speeches at yeah, this event that's being held in Bangkok. So we'll be watching all that for you today, along with those. sectors that Ryan has detailed. Hey Ryan, great to have you on the podcast. Thank you so much. I hope you have a great weekend. Ryan McCaugherty: Likewise, thank you very much. nadine: Thanks, Brian McCarty from Sandstone Insights. And that's the AM wrap for today, the 16th of October, 2026.