While the Australian market ticks many boxes from an investment perspective, Scott acknowledges the local market is highly concentrated and definitely lacks opportunities in sectors like technology, when compared to overseas markets like the United States. This means if investors want exposure to big tech, they need to go offshore.

When considering technology, Sam believes the market has been obsessed with artificial intelligence (AI) — and rightly so. Analysts at T. Rowe Price believe AI could be one of the biggest productivity enhancers for the world since the advent of electricity. However, the manager has two strong views on AI.

“Firstly, we believe many people still don’t understand the gains we’ll get from AI, particularly in terms of what it will mean for industries, and for demand and supply chains. And secondly, there are going to be some big question marks around the hyper-scalers (very large companies), and how much more capex they are going to spend on building data centres and buying graphics processing units,” he says.

“We think that while the absolute dollars of capex going to companies, like Nvidia, are increasing, the percentage growth rates of capex is peaking. Therefore, some of these companies are at very elevated multiples. We’re concerned that when the market begins to get guidance that conditions are less favourable going forward, we’ll start to see some of these multiples retract.”

As such, while T. Rowe Price remains long-term bullish on AI, when it comes to where valuations currently sit, it’s less so over the short-term. “As an investor, you need to ask yourself, will the return on investment from AI actually pay-off over the near-term? Nobody knows the answer to that yet,” says Sam. 

In terms of the AI thematic, there are two stocks that Lazard seriously looks at within its investible universe — Microsoft (which is marginally expensive, so Lazard doesn’t own this stock) and Alphabet. Warryn says these are “great quality” businesses, if you can buy them at the right price.

“Remember, the greatest business in the world does not necessarily make a good investment, if you don’t pay the right price for it. So, valuation is absolutely critical,” says Warryn.

When looking at Nvidia, for a business of its scale, Andrew has never seen a business produce the type of profitability growth that it has. As such, he says its share price performance has been warranted. However, he believes the next derivative of the Nvidia story will be how companies buying its applications, leverage this technology in their own businesses.

“It’s all about the productivity benefits technology is bringing to businesses,” says Andrew. “For example, in an advice business, people are already talking about and using technology to scale their businesses and reducing the cost to serve. And it’s also about using technology to improve efficiency, by transferring productive resources to higher value activities. That’s how we’re thinking about fintech and AI.”

When it comes to screening stocks for environmental, social, and governance (ESG), Andrew says he would be surprised if there wasn’t a manager that didn’t consider ESG when selecting stocks as part of the portfolio construction process.

Elston doesn’t have a specific strategy for ESG. Instead, ESG is integrated into its core process of stock selection. “Our view is more about the sustainability of business models,” he says. “For us, that means stakeholder engagement in managing particular risks around ESG. We do that by quantifying the risk in a particular area, and then determining how well prepared the company is in dealing with that risk.”

He cites a company like Woodside, which has high carbon emissions, but is a global leader in dealing with that risk. In such a scenario, that type of stock can be warranted in a portfolio.

Scott adds that due to shareholder pressure, the management teams and boards of companies are taking ESG a lot more seriously, compared to only a few years ago. He also cites Woodside as a good example of a company responding to ESG.

“It was shareholder pressure that forced Woodside to make some changes at board level, which forced the board to define how it’s going to deal with Woodside’s exposure to carbon over the next couple of decades. In fact, some of the more recent acquisitions Woodside has made have been specifically targeted to deal with carbon,” Scott says.

“So, the one thing we have seen change significantly has been the engagement of boards around ESG. The weight of money towards ESG is having an impact on companies, as more businesses are giving a lot more attention towards how they deal with ESG issues.”

T. Rowe Price also takes ESG seriously. It has opened a global impact strategy, which only invests in companies where the majority of their annual revenues align with the United Nations’ Sustainable Development Goals, and which are making a beneficial impact in relation to environmental and/or social improvements — like recycling or helping to improve carbon outcomes.

Currently, Scott’s favourite stock is a former market darling, CSL. This large cap Australian multinational specialty biotechnology company researches, develops, manufactures, and markets products to treat and prevent serious human medical conditions.

The company had a few hiccups recently, including the Vifor Pharma acquisition and during the COVID lockdown, when it had issues collecting plasma. These issues impacted both volumes and margins. However, CSL’s margin recovery has started to come back, recording healthy earnings growth for over five years.

A favoured stock at Elston is CAR Group. Originally known as carsales, CAR Group is a global digital marketplace company operating primarily in Oceania, Asia and the Americas, and is listed on the ASX.

“We think CAR Group’s position domestically is very strong. We think its execution and understanding of the car sales industry is exceptional, as well as its ability to innovate and globally scale its capability,” says Andrew. “This is a $600 million EBITA business that is growing at a very good rate, with expansion overseas. It’s an expensive stock, but we believe it’s worth it.”

Sam likes healthcare and he believes one of the most durable long-term growth parts of this sector is bioprocessing — a specific process that uses complete living cells or their components to obtain desired products, like vaccines. A stock he likes in this space is Danaher — an American global conglomerate that designs, manufactures, and markets medical, industrial, and commercial products and services.

A stock Lazard recommends is IGT — a multinational gaming company that delivers entertaining and responsible gaming experiences, including lotteries. According to Warryn, IGT is the largest lottery business in the world. It runs over 100 lotteries, including the Italian lottery — the world’s largest lottery. The lottery business alone currently earns IGT $1.5 billion in EBITA per annum.

When considering geopolitical risks and the likely impact on investment portfolios over the next 10 years, Sam believes geopolitics is currently being “slightly overlooked” by the markets. However, the likelihood of conflicts continuing (Russia/Ukraine) and even breaking out (Israel/Iran, China/Taiwan) remains a concern for T. Rowe Price.

“As a portfolio manager, you need to be pragmatic about how some of these events are likely to affect commodity price inflation. This means you might need to have exposures in some less ‘green’ parts of the world to hedge against these geopolitical risks.”

Scott agrees that the main concern from any geopolitical event is the potential inflationary impact this will create, which was evident during the COVID pandemic and Russia’s invasion of Ukraine.

“It’s really hard to set up a portfolio to deal with those big long TaR risks (Time at Risk is a measure of market risk. It helps to calculate the maximum period of time that an adverse event would not occur to keep an investment safe). So, while you might not actually have the risk, just the threat of it means countries revert to onshoring or friendshoring. We worry about this from an inflationary perspective and what it means for interest rates,” says Scott.