Ausbiz: A Third Dimension

Well, 2026 has so far seen a big rotation towards real world physical assets.

To discuss the opportunities, we're joined by Sam Ruiz from T. Rowe Price.

Sam, welcome.

Good to see you again, Andrew.

So front and centre, of course, is the conflict in the Middle East.

Has that only perhaps made those real assets even more attractive in this current environment?

Yeah, I'd say, I mean, it's a shock.

It's devastating what's happening at the moment.

The footage you just showed actually was, it's incredible to see, almost feels unbelievable.

But what it really does to your point is it, it creates a third dimension to what we've been seeing in equity markets so far this year.

So we've really, up until the weekend, been seeing 2 forces collide.

We've seen the acceleration of the manufacturing segment and the CapEx cycle in the US economy.

So for the longest stretch of any other period since the surveys began in the 40's, the USPMIS have been below 50 for about 2-3 years now.

In January, we saw surge above 50.

And overnight, we actually had the second sequential monthly print of more than 50, around 52 on those PMI.

So we're seeing companies in industries or sectors such as industrials really accelerate on the back of that.

That is really good for these real physical asset companies that do real things in the economy.

And that force has been butting up against the concern we've been seeing in AI.

So worry about disruption, we've seen it in software, worry about some of these companies spending too much.

Now we have this third dimension, which actually creates more of a rush to real assets that are secure for investors in a world where we have to put a high risk premium in an era of conflict.

And this conflict certainly feels like an escalation which is larger than any we've seen probably since 2022 when Russia invaded Ukraine.

And not surprised by some of the moves we're seeing overnight in response to that.

Well, and we have seen that rotation particularly out of tech into energy, materials, industrials.

Yeah.

Is this a binary trade?

I think it's hard to say is it a binary trade?

I think it's very nuanced.

So if you think about how investors traditionally want to invest, they want to put a value on forward-looking cash flows, what a company can actually deliver in the future.

Now if you're a company like Salesforce, for example, in software, investors might see having a really good business now, but there's less certainty around what around whether AI disrupts your business in years 2,3,4,5.

So we're seeing the longer data valuation those companies compress.

On the other side, we're actually seeing within tech hardware companies be quite resilient because amongst all of this, this disruption in tech is actually validating that this new AI tech is actually a worthwhile investment.

It is proving that it can improve productive productivity.

Companies are embracing it.

That means we're very likely to see continued spending on building the capacity, the compute capacity of AI, which is really great if you're a company that's supplying whether it's electrical conduit, optical connectors, whether it's the racks that all the servers go in that supply into NVIDIA, that's the TSMC are using that the big hyperscalers are buying.

So I don't think it's as much as binary.

It's quite nuanced.

But certainly investors are thinking I have less certainty about the future, whether it's war, whether it's AI disruption.

I'm willing to pay more in the near term for companies where I think there will be energy demand in three years time irrespective of some of these dynamics.

All right.

So in particular, as you mentioned there, that AI tech hardware, you're seeing opportunity there, particularly as those hyperscalers build out that AI capacity.

So where are you looking specifically?

So this is something where our view has changed.

So initially it was all about those that are going to be the front end monopoly supplies to build AI companies like NVIDIA, for example, companies that have the ability to actually invest and potentially monetize AI.

That's Google, that's Amazon, that's Microsoft.

Now we're seeing a bit of a shift.

The worry we have is that some of the forced competitive dynamics within AI world means that companies such as Amazon, such as Google, such as Microsoft, will have to spend irrespective of whether they can monetize AI.

And that's because all of a sudden, AI is becoming a threat to their businesses that used to be monopolies.

So if you're forced to spend, irrespective of profitability, that's potentially bad for your returns, but it's really good for the ecosystem that you're actually buying all these components from.

So we actually have quite a long list of companies spaced across the world.

Actually, a lot of them are based in Asia.

So companies such as SK Hynix, for example, or Samsung that provide memory.

One hot tip for you, the memory prices have shot through the roof because the demand for memory in AI is extraordinary.

It's very memory intensive and there's only a fixed amount of memory supply we can even produce.

So if you're buying an iPhone or a smartphone in the future, the cost to upgrade for high memory handset is going to be a lot larger than you would have found in the past.

So there's a wide range of companies supplying it.

We just think this is a very cyclical sector that used to have sort of short cycles.

But if these companies, which we believe they will keep spending to build AI, the hyper scalers, we're actually going to see a much more fruitful but longer cycle that we haven't seen before for these companies.

Sam, what we were talking just before we came on about that response we saw on Wall Street, given the conflict of that first day of trade there, perhaps surprised that they actually ended in the green.

Yeah.

What why do you think that is?

And, and what are you looking for?

The perhaps reflecting what we're seeing in the in the US economy at the moment.

Clearly President Trump wanted to pump the economy towards the midterms.

Yeah.

But now, of course, we potentially have that break of higher energy prices and the potential inflationary effect of that.

Yeah.

So I think that is the question you need to ask right now and everyone else to think about.

I'm actually quite encouraged by the market's reaction over the last couple of days for a number of reasons.

Firstly, we saw the yields actually move higher yesterday in the US, but the day before that when we was actually close to the conflict, we actually saw strong demand for U.S. Treasuries.

That's very healthy because for the last 12 months in times of stress, investors have been saying normally I'd buy US denominated debt.

I don't trust maybe the US government anymore or maybe the US fiscal position is in a bad position.

I don't want to own that.

I want to own gold.

So demand for US as a safe haven asset was actually quite encouraging.

When we think about oil, the oil price, you said sort of Brent crude went up to about US $82 overnight and it wasn't really open until yesterday because it doesn't really trade very with much liquidity Over the weekend that actually saw oil traders selling it at around US $80 a barrel sort of to bringing it back down.

So it shows that investors aren't wanting this to get away from itself and realizing that if you look at the last history back to the 80s in response to military conflicts, we've traditionally on average or the median has actually seen oil prices retrace all their gains within 4-5 months.

And we've actually seen any equity market weakness retrace losses within 4-5 months also.

So I think investors are betting that this is probably going to be a short conflict.

And I love the question you asked about the midterms.

I would assume that Trump wants a healthy, growing economy without a conflict, which let's pause for a moment.

It is a very unpopular attack in the US.

So it's only around 25% of Americans support this attack.

Well, particularly among his base. Among his base as well, correct?

So I think that it's likely, and Trump said 4-5 weeks, nobody knows how long this goes for, but I think investors are saying this is probably going to be a short, swift tack.

And then underlying all of that, if this moves past us, the underlying momentum in the US economy particularly is actually really healthy.

So we'll see how this plays out.

But I'm just encouraged that the US equity market was 1.5% lower, moved higher and encouraging reaction so far.