1 00:00:05,600 --> 00:00:08,560 Speaker 1: Welcome to the Fear and Greed Business Interview. I'm sure almam. 2 00:00:08,880 --> 00:00:12,000 Speaker 1: SMPA six two hundred tumbled more than five percent over 3 00:00:12,039 --> 00:00:15,080 Speaker 1: the last two sessions, the worst sell off in more 4 00:00:15,120 --> 00:00:17,439 Speaker 1: than a couple of years. It follows growing fears in 5 00:00:17,440 --> 00:00:21,000 Speaker 1: the US, the world's largest economy, is heading for a session. 6 00:00:21,280 --> 00:00:24,239 Speaker 1: Roger Montgomery is the founder and chief investment officer at 7 00:00:24,239 --> 00:00:27,920 Speaker 1: Montgomery Investment Management. Roger, welcome back to Fear and Greed. 8 00:00:28,360 --> 00:00:30,720 Speaker 2: Thanks very much, great to be with you. Sean, spare 9 00:00:30,720 --> 00:00:33,680 Speaker 2: a thought for the Japanese investors, who, as we speak 10 00:00:33,720 --> 00:00:35,680 Speaker 2: are down twelve point four percent today. 11 00:00:36,159 --> 00:00:39,879 Speaker 1: I know hammered, what's going on? Why is it happening. 12 00:00:39,800 --> 00:00:43,839 Speaker 2: Well in the Japan scenario. We were talking about this 13 00:00:43,920 --> 00:00:46,760 Speaker 2: across our desk today and Dominic Rose, who's one of 14 00:00:46,760 --> 00:00:50,080 Speaker 2: the portfolio managers for the Small Company's fund, he was 15 00:00:50,120 --> 00:00:52,320 Speaker 2: pointing out that there's an unwind of what's called the 16 00:00:52,360 --> 00:00:55,800 Speaker 2: Japanese carry trade. So people were borrowing money in Japan 17 00:00:55,960 --> 00:00:58,560 Speaker 2: to buy Nasdaq stocks and they're unwinding that. So you're 18 00:00:58,600 --> 00:01:01,920 Speaker 2: seeing that reflected in the knicker ouch. Nickuy's getting a 19 00:01:01,960 --> 00:01:05,240 Speaker 2: lot stronger, and so that's not the case in Australia. 20 00:01:05,360 --> 00:01:07,720 Speaker 2: In Australia, we're falling in sympathy, I guess with the 21 00:01:07,840 --> 00:01:12,199 Speaker 2: United States. And that really started, I think a few 22 00:01:12,200 --> 00:01:16,680 Speaker 2: weeks ago when people were starting to question something that 23 00:01:16,720 --> 00:01:19,480 Speaker 2: I'd written about in The Australian actually about a year ago, 24 00:01:20,120 --> 00:01:22,480 Speaker 2: and that was the monetization of AI. So there was 25 00:01:22,480 --> 00:01:25,760 Speaker 2: a lot of hype around AI. And of course, whenever 26 00:01:25,800 --> 00:01:30,000 Speaker 2: a new technology is launched, investors think that not only 27 00:01:30,040 --> 00:01:32,240 Speaker 2: is it going to change the world, but everyone's going 28 00:01:32,280 --> 00:01:34,920 Speaker 2: to make a lot of money, which is rarely the case. 29 00:01:35,400 --> 00:01:38,000 Speaker 2: And the issue for AI is the monetization of it. 30 00:01:38,040 --> 00:01:41,200 Speaker 2: And what happened was we saw some pretty key individuals 31 00:01:41,520 --> 00:01:45,600 Speaker 2: in the tech industry pointing out that and Zuckerberg was 32 00:01:45,600 --> 00:01:48,440 Speaker 2: one of them over at Facebook, that it's going to 33 00:01:48,480 --> 00:01:51,520 Speaker 2: take some time to monetize AI. It's going to improve 34 00:01:52,320 --> 00:01:54,840 Speaker 2: the experience for many users, and there's going to be 35 00:01:54,920 --> 00:01:59,520 Speaker 2: some enhancements to the functionality, but that doesn't necessarily mean 36 00:01:59,520 --> 00:02:01,160 Speaker 2: that they're going to be able to charge more and 37 00:02:01,200 --> 00:02:04,040 Speaker 2: that people will pay more for the services and the 38 00:02:04,040 --> 00:02:06,960 Speaker 2: things that they're using, and that's that was the big issue, 39 00:02:07,040 --> 00:02:09,680 Speaker 2: I think. So then you had a lot of hype 40 00:02:09,720 --> 00:02:12,560 Speaker 2: built into stocks, but not a lot of revenue growth 41 00:02:12,880 --> 00:02:17,160 Speaker 2: from AI particularly, and so we saw that whole thematic 42 00:02:17,240 --> 00:02:20,639 Speaker 2: start to be questioned. That started the sort of cascading 43 00:02:20,680 --> 00:02:24,160 Speaker 2: of selling, and because those tech stocks represent such a 44 00:02:24,200 --> 00:02:26,679 Speaker 2: large part of the market, you know, that pushes the 45 00:02:27,000 --> 00:02:29,760 Speaker 2: broader indices down, the S and P five hundred, the Nasdaq, 46 00:02:29,800 --> 00:02:33,360 Speaker 2: and so forth. And there was also i should say 47 00:02:33,880 --> 00:02:36,799 Speaker 2: a little bit of rotation as well, out of those 48 00:02:36,840 --> 00:02:39,960 Speaker 2: big tech stocks and into some small caps. So if 49 00:02:39,960 --> 00:02:42,200 Speaker 2: you look over one year, for example, the Nasdaq is 50 00:02:42,280 --> 00:02:45,080 Speaker 2: up about twenty percent, and the S and P six hundred, 51 00:02:45,160 --> 00:02:47,920 Speaker 2: which is the small cap index over there, is up 52 00:02:47,960 --> 00:02:51,600 Speaker 2: only six percent or seven percent, and the Russell two thousand, 53 00:02:51,639 --> 00:02:54,360 Speaker 2: which is another small cap index in the United States, 54 00:02:54,760 --> 00:02:57,440 Speaker 2: is up about eight percent. But if you look over 55 00:02:57,480 --> 00:03:00,519 Speaker 2: the last month, then what you find is the NASDAK 56 00:03:00,639 --> 00:03:04,040 Speaker 2: is down about nine percent, and the Russell two thousand 57 00:03:04,160 --> 00:03:06,520 Speaker 2: and the S and P six hundred they're up between 58 00:03:06,560 --> 00:03:09,360 Speaker 2: four and five and a half percent. So the small 59 00:03:09,400 --> 00:03:13,400 Speaker 2: cap indices over the last month have done relatively better 60 00:03:14,080 --> 00:03:17,680 Speaker 2: than the Nasdaq, which is coming off because of that 61 00:03:17,800 --> 00:03:20,080 Speaker 2: sell off in the AI names that we or the 62 00:03:20,120 --> 00:03:22,960 Speaker 2: AI thematic names that I mentioned a moment ago. 63 00:03:23,600 --> 00:03:26,160 Speaker 1: What about the macro effects. We had some labor force 64 00:03:26,200 --> 00:03:29,079 Speaker 1: figures in the US. Late last week, we had manufacturing figures. 65 00:03:29,320 --> 00:03:31,240 Speaker 1: I mean, they weren't a disaster buy any stretch, but 66 00:03:31,280 --> 00:03:33,880 Speaker 1: they did suggest unemployment was peaking up faster than expected, 67 00:03:34,080 --> 00:03:37,800 Speaker 1: manufacturing was slowing more than expected. But it wasn't They 68 00:03:37,840 --> 00:03:40,760 Speaker 1: weren't disastrous, But I mean, how did that feed into it? 69 00:03:40,760 --> 00:03:44,000 Speaker 1: Because that also seemed to be impetus for the broad 70 00:03:44,040 --> 00:03:45,640 Speaker 1: based sell off, not just the tech stocks. 71 00:03:45,960 --> 00:03:49,200 Speaker 2: Well, here's the big mistake everyone makes, Sean, and that 72 00:03:49,320 --> 00:03:53,600 Speaker 2: is that there is a consistent and rational response to 73 00:03:53,680 --> 00:03:57,400 Speaker 2: macroeconomic news. You know, it was only a little while 74 00:03:57,400 --> 00:04:00,480 Speaker 2: ago that hopes of an interest rate cut bird a 75 00:04:00,600 --> 00:04:04,480 Speaker 2: rally in stocks. Now that rate cuts are more likely, 76 00:04:04,720 --> 00:04:06,560 Speaker 2: and in fact rates have been cut by the Bank 77 00:04:06,560 --> 00:04:10,840 Speaker 2: of England, the European Central Bank, Canada, Sweden, the US 78 00:04:10,960 --> 00:04:14,320 Speaker 2: is talking about it in September. Now that that's happened 79 00:04:14,440 --> 00:04:18,120 Speaker 2: or more likely to happen, stocks are coming off. It's 80 00:04:18,200 --> 00:04:20,960 Speaker 2: just a mistake to think that the response by the 81 00:04:21,000 --> 00:04:24,680 Speaker 2: market is consistent. The same news event a year ago 82 00:04:24,880 --> 00:04:28,159 Speaker 2: will prompt a different reaction to how that news will 83 00:04:28,839 --> 00:04:33,520 Speaker 2: cause markets to move today, and in any case, there 84 00:04:33,560 --> 00:04:37,800 Speaker 2: is very little correlation, for example, between economic growth and 85 00:04:37,880 --> 00:04:41,279 Speaker 2: stock market performance in any twelve month period. So the 86 00:04:41,320 --> 00:04:45,200 Speaker 2: only reason why I think markets might be more focused 87 00:04:45,200 --> 00:04:48,200 Speaker 2: on macroeconomic news at times is because there's a dearth 88 00:04:49,240 --> 00:04:52,480 Speaker 2: of other information that they can react to. Typically, July, 89 00:04:52,640 --> 00:04:56,640 Speaker 2: for example, is pretty quiet on the individual company front, 90 00:04:56,880 --> 00:04:59,680 Speaker 2: because companies are preparing to announce their full year results 91 00:04:59,720 --> 00:05:02,440 Speaker 2: or their half year results or second quarter results rather 92 00:05:02,480 --> 00:05:04,240 Speaker 2: in the United States, and full year results here in 93 00:05:04,279 --> 00:05:08,040 Speaker 2: Australia in August, and so July tends to be a 94 00:05:08,040 --> 00:05:12,360 Speaker 2: bit quieter, and so investors might be looking to macroeconomic 95 00:05:12,440 --> 00:05:15,000 Speaker 2: news for direction, but most of the time there's very 96 00:05:15,000 --> 00:05:19,000 Speaker 2: little correlation. There's certainly no consistent reaction or response to 97 00:05:19,040 --> 00:05:19,960 Speaker 2: that economic news. 98 00:05:20,520 --> 00:05:22,440 Speaker 1: Stay with me, Roger will be back in a minute. 99 00:05:29,000 --> 00:05:34,239 Speaker 1: I'm speaking to Roger Montgomery from Montgomery Investment Management. Okay, 100 00:05:34,279 --> 00:05:37,120 Speaker 1: so where we stand this morning, what do you think 101 00:05:37,120 --> 00:05:39,599 Speaker 1: will happen over the next few days? Do you think 102 00:05:41,000 --> 00:05:43,040 Speaker 1: i'd well. 103 00:05:42,880 --> 00:05:44,880 Speaker 2: Without a gun to my head, I'd say I don't know, 104 00:05:45,000 --> 00:05:47,640 Speaker 2: But if you put it unto my head, I think 105 00:05:47,720 --> 00:05:51,680 Speaker 2: what's I think the narratives changed slightly the reality is 106 00:05:51,720 --> 00:05:55,359 Speaker 2: that these US technology companies, and I don't mean the 107 00:05:55,400 --> 00:06:00,719 Speaker 2: AI directly exposed technology companies, just the big information technolog companies. 108 00:06:01,160 --> 00:06:03,479 Speaker 2: You know, they have some pretty unique characteristics. You know, 109 00:06:03,480 --> 00:06:06,440 Speaker 2: they're based in the United States, which has helped make 110 00:06:06,480 --> 00:06:10,200 Speaker 2: them popular. The US is pretty incredible as a country. 111 00:06:10,200 --> 00:06:13,480 Speaker 2: It's the largest economy in the world. It only exports 112 00:06:13,839 --> 00:06:17,440 Speaker 2: about twelve percent of its GDP, so it's more resilient 113 00:06:17,520 --> 00:06:21,800 Speaker 2: and therefore less reliant on other countries' economic performance. They've 114 00:06:21,800 --> 00:06:25,680 Speaker 2: got the best demographics of any developed country in the world. 115 00:06:26,040 --> 00:06:29,800 Speaker 2: Their labor force is measurably more productive than most of 116 00:06:29,839 --> 00:06:33,479 Speaker 2: their peers. They've got more arable land than others. And 117 00:06:33,520 --> 00:06:35,760 Speaker 2: then of course, you know, they've got arguably the best 118 00:06:35,839 --> 00:06:40,000 Speaker 2: tertiary institutions, certainly the deepest capital markets. So there's a 119 00:06:40,000 --> 00:06:43,039 Speaker 2: lot of reasons to like the US economy and to 120 00:06:43,160 --> 00:06:47,320 Speaker 2: light companies in the US. There's also been a flood 121 00:06:47,320 --> 00:06:50,160 Speaker 2: of very cheap money that has meant people have gone 122 00:06:50,160 --> 00:06:53,919 Speaker 2: and bet on those big companies. Now, those big companies 123 00:06:54,720 --> 00:06:58,000 Speaker 2: have also had the second highest margins of all sectors, 124 00:06:58,560 --> 00:07:02,599 Speaker 2: second highest only to real estate investment trusts. They've also 125 00:07:02,800 --> 00:07:07,440 Speaker 2: got the highest forecast earnings growth of all sectors, sorry, 126 00:07:07,440 --> 00:07:11,720 Speaker 2: I should say communications services and information technology combined have 127 00:07:11,840 --> 00:07:15,280 Speaker 2: the highest earnings growth forecasts. So there's lots of reasons 128 00:07:15,280 --> 00:07:19,520 Speaker 2: to own these companies. All that's changed is the narrative. 129 00:07:19,960 --> 00:07:23,400 Speaker 2: The narrative is switched from hey, pay any price for 130 00:07:23,440 --> 00:07:26,400 Speaker 2: these companies to oh, ge, people are selling them to 131 00:07:26,400 --> 00:07:29,120 Speaker 2: buy something else, or there might be a recession or whatever, 132 00:07:29,640 --> 00:07:32,760 Speaker 2: something perhaps unrelated to the performance of these companies, and 133 00:07:32,800 --> 00:07:35,760 Speaker 2: that's triggering a reappraisal of their pricing. But if you 134 00:07:35,760 --> 00:07:38,400 Speaker 2: look at the performance of some of these businesses, takes Spotify, 135 00:07:38,520 --> 00:07:41,920 Speaker 2: for example, in the last two quarters, it's raised its 136 00:07:41,960 --> 00:07:45,360 Speaker 2: prices for its subscription, and yet it's taken on more 137 00:07:45,480 --> 00:07:47,960 Speaker 2: net subscribers in the last quarter on the quarter before 138 00:07:47,960 --> 00:07:50,720 Speaker 2: that than it ever has before five I think it 139 00:07:50,760 --> 00:07:53,160 Speaker 2: took on seven million last quarter and its forecast to 140 00:07:53,200 --> 00:07:56,480 Speaker 2: take on five million this quarter. And that's even though 141 00:07:56,720 --> 00:07:59,600 Speaker 2: it raised its price. Now, that's an ideal business that 142 00:07:59,720 --> 00:08:04,920 Speaker 2: when more customers as its price goes up. So you know, again, fundamentally, 143 00:08:05,120 --> 00:08:06,360 Speaker 2: you know there are a lot of I should say, 144 00:08:06,360 --> 00:08:09,360 Speaker 2: there's a lot of idiosyncratic reasons for owning these stocks. 145 00:08:09,880 --> 00:08:12,680 Speaker 2: But the narrative has just changed. That tells me that 146 00:08:12,920 --> 00:08:16,560 Speaker 2: it's very likely to be temporary and people will probably 147 00:08:16,560 --> 00:08:20,520 Speaker 2: want to buy stocks again when they see prices appealing 148 00:08:20,640 --> 00:08:21,560 Speaker 2: enough or cheap enough. 149 00:08:22,440 --> 00:08:24,440 Speaker 1: Is it not a bad thing though, that people now 150 00:08:24,480 --> 00:08:26,240 Speaker 1: have to go to the fundamentals. So you look at 151 00:08:26,240 --> 00:08:30,040 Speaker 1: Spotify for example versus Meta slash Facebook, whereby this say 152 00:08:30,080 --> 00:08:31,680 Speaker 1: we're still going to make money out of it, We're not. 153 00:08:32,000 --> 00:08:34,560 Speaker 1: I mean, investors don't necessarily need to dump Meta, but 154 00:08:34,679 --> 00:08:37,720 Speaker 1: the idea is that the return from the AI investment 155 00:08:37,800 --> 00:08:41,120 Speaker 1: might just take more time in real dollars. So what's 156 00:08:41,160 --> 00:08:43,079 Speaker 1: happening now at least people have to go back and 157 00:08:43,240 --> 00:08:45,160 Speaker 1: sort of forget the hype a little bit. Yea. 158 00:08:45,600 --> 00:08:47,360 Speaker 2: What they're doing at the moment is they're guessing what 159 00:08:47,440 --> 00:08:50,600 Speaker 2: other people are going to guess. That's, you know, that's 160 00:08:50,640 --> 00:08:52,840 Speaker 2: the sort of that seems to be what's. 161 00:08:52,679 --> 00:08:54,160 Speaker 1: Happening a way for the market to do. 162 00:08:54,679 --> 00:08:59,439 Speaker 2: Yeah, And the people are selling in anticipation of other 163 00:08:59,440 --> 00:09:03,920 Speaker 2: people selling. It's because they don't really care about the fundamentals. 164 00:09:03,960 --> 00:09:07,880 Speaker 2: But eventually prices become attractive and people become more discerning. 165 00:09:07,920 --> 00:09:10,559 Speaker 2: Investors become more discerning, and they look at the fundamentals 166 00:09:10,559 --> 00:09:12,920 Speaker 2: again and they say, Wow, this thing's got no debts, 167 00:09:12,920 --> 00:09:15,440 Speaker 2: throwing off enormous free cash flow. Its earnings are growing 168 00:09:15,440 --> 00:09:18,440 Speaker 2: at double digit rates, it's got huge return on equity, 169 00:09:18,679 --> 00:09:22,000 Speaker 2: and it's entrenching its economic moat or its competitive advantages. 170 00:09:22,280 --> 00:09:23,840 Speaker 2: That's the sort of business I want to own, and 171 00:09:23,880 --> 00:09:26,240 Speaker 2: they buy it again. Now. The interesting thing is there's 172 00:09:26,280 --> 00:09:29,880 Speaker 2: a lot of innovative, fast growing companies in the small 173 00:09:29,880 --> 00:09:33,160 Speaker 2: cap space. They've been left behind. We've talked about this 174 00:09:33,240 --> 00:09:37,079 Speaker 2: in past episodes. They've been left behind in that AI rally, 175 00:09:37,120 --> 00:09:41,120 Speaker 2: that mega tech megacap rally, and so I think there's 176 00:09:41,120 --> 00:09:43,520 Speaker 2: a bit of a rotation going on and people are 177 00:09:43,559 --> 00:09:47,000 Speaker 2: starting to see merit in these cheapest, smaller companies, both 178 00:09:47,040 --> 00:09:49,079 Speaker 2: domestically and also overseas. 179 00:09:49,640 --> 00:09:51,319 Speaker 1: Roger, thank you for talking to Fear and Greed. 180 00:09:51,679 --> 00:09:53,360 Speaker 2: Always a pleasure. Seawan, good to be with you again. 181 00:09:53,720 --> 00:09:56,560 Speaker 1: That was Roger Montgomery, founder and chief investment officer at 182 00:09:56,600 --> 00:09:59,840 Speaker 1: Montgomery Investment Management. This is the Fear and Greed Business Interview, 183 00:10:00,160 --> 00:10:02,559 Speaker 1: but this is general information only, and you should always 184 00:10:02,559 --> 00:10:06,120 Speaker 1: seek advice before making investment decisions. Join us every morning 185 00:10:06,160 --> 00:10:08,240 Speaker 1: for the full episode of Fear and Greed Daily Business 186 00:10:08,280 --> 00:10:10,760 Speaker 1: news for people who make their own decisions. I'm Seane 187 00:10:10,800 --> 00:10:12,000 Speaker 1: elma Enjoy your day.