Emily Roland, co-chief strategist at John Hancock Investment Management, spoke with Quartz for the latest installment of our “Smart Investing” video series.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
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ANDY MILLS (AM): So there’s a theory that OpenAI could lose as much as $5 billion this year and could be headed to bankruptcy by next year. Do you think there’s any credence to that? Should the investors in the AI boom be worried?
EMILY ROLAND (ER): Look, we think we’re in the early stages of AI adoption. It’s got many years to go in terms of implementation. I think what investors are concerned about right now is how is it being monetized? It’s the ‘show me’ moment as far as AI and the tech sector goes. And I think that’s one reason that we’ve seen some challenges around earnings season. The earnings are still there, but again, investors really wanna see how this is being shown up in sales growth and monetization. So when we think about AI, we’re still overweight mega-cap tech. These are high quality companies. They have tons of cash, they have great return on equity. They have a limited need to tap the capital markets in order to grow, which is a huge advantage in an environment where interest rates are at 5.5%. The challenge, of course, is in the valuation. So a lot was in the price going into this earnings season. And now the S&P 500 growth index, which is where a lot of those companies live, is trading at almost a 50% premium to its 20-year average. You know, valuations are not necessarily a catalyst. We can see them continue to expand here, but we wanna diversify also from that mega cap tech names by owning things that are on sale. And right now we’re really focused on quality at a reasonable price. I think we’ve made that term up, I’m not entirely sure, but it’s really focused on looking for parts of the market that are on sale.
AM: So what’s on sale?
ER: Well, we like areas like mid-cap value stocks, industrials in particular. So there’s another trend that’s happening right now that’s kind of more under the surface, which is one of onshoring, reshoring. There’s manufacturing happening in the United States today that’s a result of supply chains being moved back here from China and other parts of the world. It was a trend that was in place prior to Covid that’s really been accelerated, especially in the light of the fact that we’re doing a ton of fiscal spending on manufacturing. Whether it’s things like the CHIPS Act, the Infrastructure and Jobs Act — all of those things are being funneled into this kind of manufacturing renaissance that we’re seeing in the United States today. And we look at industrial stocks as really being kind of the key beneficiary of those trends. So think mid-caps, Midwest, which is where we’re seeing a bulk of this activity happen. And it’s a longer term secular trend that you’re not overpaying for. In fact, mid-cap equities are trading at the steepest discount to their large-cap counterparts since the late 1990s. So we think there’s a nice opportunity there.
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AM: Earnings season is underway and a lot of the big tech companies are getting punished for missing, and punished more than usual, are mid-caps the place to go for safe harbor in these moments?
ER: Yeah. We certainly think that’s one opportunity to diversify away. And let’s face it, mid-cap or mega-cap tech is probably due for a breather. There’s been a huge run-up. Tech stocks are up 33% over the past year, far better than the broad market. Some of those Magnificent Seven, or I guess you can call them the ‘lag seven’ right now, not the ‘Mag Seven,’ have seen a huge run-up in price. So the expectations are very high. The bar is very high. Trying to come up with an Olympics analogy for us right now. But the bar is tough to overcome. So we wanna think about, again, diversifying from that mid-caps or one spot to do that. We’ve seen a huge rotation into small cap equities. We can talk about that. We would probably fade that. We think a lot of that is sentiment driven and driven from kind of expectations of a shift in the political regime right now. But again, mid-caps really being the sweet spot in terms of playing that rotation.
AI investors want to see it monetized now, strategist says
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