Ausbiz: Market outlook midst geopolitical uncertainties and elevated equity market levels

Let's get across the market outlook, particularly with a focus on the U.S., Sam Ruiz joining us from T. Rowe Price.

Sam, welcome back.

Good to see you.

Good to be back, Andrew.

And given all that uncertainty and drama that's playing out, particularly geopolitically, you take a look at what's going on in equity markets at the moment, remaining at those elevated levels, near record highs.

How do you explain that?

Yeah, I mean, I can't personally explain it.

I feel like we're a bit of a broken record.

3-4 weeks ago, we were advocating for some caution.

And I think for investors really right now globally, investors feel quite fearless.

Maybe there is the potential that there's little alternative.

There is some Bitcoin and gold you see investors rushing to, but maybe people are less inclined to want to own U.S. Treasuries, own U.S. debt or dollars at all.

I guess I'd come back to we have a world now that is globally slowing when it comes to GDP.

The World Bank actually put out figures that said we're on track for the slowest decade of global growth since the 60s.

We have earnings growth also slowing and we now have the US, the largest economy, basically retracing back from their big plans, which was 333, A 3% deficit, 3% growth and also 3% increase in oil production.

We're basically seeing that they're backing away from all of that.

Yet investors are basically putting the same valuation on markets that we had at the beginning of the year and we're near all time highs.

So it is a bit of  a head scratch.

I think investors still just need to be cautious.

It's be a bumpy ride from here.

So what's the outlook then for those corporate earnings, particularly when we just heard from the Fed there in terms of its economic projections with that word stagflationary sort of looming?

Yeah, So I think that is a huge level of uncertainty.

About 3 or 4 weeks ago, I was explaining to you on the programme that people were quite confident in the first quarter earnings we saw out of the US, but that was backward looking data really before Liberation Day.

Now there's a really big question mark, how much of sort of the economic slowdown is happening under the covers that we can't really see in hard data yet, How much the input costs already starting to rise and companies are going to see weaker margins.

How much are consumers slowing down their spending behaviours?

I'm personally more worried about a bit more divergent in the good and bad companies we see out of this upcoming quarterly earnings result.

We're seeing increased signs and in my opinion, companies are starting to get a bit worried about cost cuts.

I think you mentioned Microsoft here on the sales side.

Maybe it's because they want to redirect and funnel money away to AI.

Maybe it's because they're worried about a weakening economy.

We also had Procter and Gamble PNG, very large staples company reduced 15% of their non manufacturing workforce recently as well.

So something's happening.

It'll be really interesting to see, though which companies can fight it.

I think we're just gonna see a few more weaker prints this quarter.

And you mentioned there perhaps companies refocusing more focusing on AI as maps we're seeing with Microsoft there.

Sam, so you just returned from the US. What picture are you seeing unfold with the development of AI at the moment?

So I feel like we're a broken record in terms of value the last 6 or 8 weeks when it comes to a weaker economy.

We're an even stronger broken record when it comes to AI and it's influence over the world.

I came back, we had a little bit more of a cautious view coming into the year that maybe some of it was overdone.

I was completely surprised and I feel wrong footed around how fast AI is progressing, even faster than I could have imagined.

There was a really interesting data point that came out from one of our company meetings where this software company said their biggest competitor isn't actually another very large blue chip competing software company.

Their largest competitor was Open AI.

What that basically means is potentially if you were using a software platform like Salesforce that was a monopoly, it was really entrenched into your business.

Companies like that now worry that we can just go to open AI and use what we're going to know of these things called AI agents and basically say we've got all the data, we've got the databases, we've got the spreadsheets.

Why don't you go figure out the problem and bring it back to me versus me needing this expensive subscription based software platform?

We've seen really big innovations leap forwards in I think sooner than we can imagine.

There's going to be autonomous driving semi trailers.

One particular company told us that they wouldn't have been able to bring them closer to life if it wasn't for AI in the near term.

1 crazy statistic was they're expecting a ratio another company of three to one robots to humans in the near future in the world.

That's just mind blowing to me.

So this is coming much faster than I could have even imagined.

And that's why we're starting to see CapEx and investment in AI reaccelerate.

Microsoft try to re pivot cash flow and Mark Zuckerberg from Meta actually is paying sign on bonuses as high and this was reported as $100 million for key individuals from open AI.

That's how critical they think that AI is for the future.

So Sam, if you want to follow the money from an investor perspective, where would you be looking?

So I think we're finding interesting second layer or second derivative opportunities now.

So it was very much magnificent.

7, it was all about NVIDIA and GPUs.

One really interesting place which comes with a bit of underlying worry is that a smaller company that we've invested in called Cyber Ark.

Now this is a company that was created in 1999.

They've been growing their revenues for the last decade over 30% per annum.

So it's already been very strong growth.

But this is a company that specialises as the global leader in what we call privileged access management.

That means key critical personnel in your firm that have access to systems that are critical for whether it be a database or how your organisation operates, really protecting the right users from have access is critical.

What we're seeing now is AI is a super incredible tool for good users, but it's indiscriminate and people that want to use it for worse reasons.

AI doesn't ask questions and it will go and do that task.

So we're expecting a proliferation of increased cyber threats and cyber attacks.

What we're also expecting in conjunction with that is companies are going to be installing virtual AI agents into their businesses, doing a lot of tasks that humans might have done in the past.

So if you're a company now and you're competing against more threats coming from AI, but also you can put on a million AI agents as personnel in your firm at very low cost, you need to now make sure that you're giving those AI agents the right access and defending from the proliferation of increased threats.

That means the usage and the users that are going to use software like Cyber Ark are going to dramatically increase in our view.

So what you're using those AI agents, but they can't necessarily detect any of those cyber threats.

Well, these aren't AI agents that are actually getting sort of threats away from your business.

These are AI agents that are working within your organisation that you might say I need you to access these systems, these databases, these spreadsheets, and if you're accredited AI agent that has access to them.

A company actually needs to ensure that the right layer of authentication and access is given to that AI agent and not someone that's going to access it for the wrong reasons.

So for arguments sake, if you had 1000 staff, but AI now means that you can have a million AI agents in your business, how do you make sure that those additional million users of your database have the right access?

That means you're going to need a lot more use of these cyber protection systems.

So you're saying Cyber Ark is in pole position here and there.

Are there any other cyber firms?

Then they're playing catch up in that space.

There's many cyber firms.

This is specifically the leader in what we call privileged access management.

So there's they also have a business, there's one similar called Okta that is more about authentication.

So if you're trying to access the system, you might get the text message that has the unique code or an app that actually says, you know, Face ID to get in.

This is specifically a really critical infrastructure token that says if you want to get into this very important part of our business, our infrastructure systems or databases, we need to uniquely make sure that you're authenticated to get in there.

That's a much more sophisticated and important part of the business you're trying to protect.

There's very few companies that can do that, and Cyber Ark happens to be the global leader.