Finding value beyond the AI trade

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SIMON BROWN: I’m going to be chatting now with Keith McLachlan of Element Investment Managers. I’m thinking around the AI trade, but thinking around, hang on, what aside from the AI trade? Quickly, before I get Keith on, what have the Mag Seven done?

Looking year to date, Alphabet is [up] almost 10%, Tesla off 17.5% – it’s in the red . Nvidia is almost 26% up, Apple 23% higher, Microsoft almost 8%, Amazon 9%, and Meta 10.5.%

Most of that – Meta’s – happened in the last week or so.

So AI stocks are having a year, make no mistake. But, Keith McLachlan, there’s more than AI, and there are other stocks out there, sectors in the offshore space, that have actually had a good year.

We saw it last earning season. Sure, there were lots of numbers from the big tech stocks, the big AI trade, and a lot of good numbers elsewhere.

Where have you been finding value outside the AI trade?

KEITH McLACHLAN: Good morning, Simon. Well, the first question that has to be asked – obviously in the world with such disruption from AI – is: are you looking at value or a value trap? Some of these things are beaten down because AI is going to dislodge them and there are all sorts of negative narratives around that.

But standing back and considering different sectors and different companies in them – because there might be winners and losers within sectors – we think that there are a couple of themes that are just agnostic to AI. It doesn’t affect them or, in fact, stand to win from them.

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There are the European luxury [brands] that have sold off hard. There’s healthcare, and specifically in that eye care.

Emerging markets, in fact Chinese tech, are increasingly dislodging from AI by building their own.

Then we have consumer staples – I don’t think AI is going to stop us eating or cleaning out hair or cleaning our teeth – things like that.

And then there’s an interesting little pocket – and these are all very different stocks from each other. We colloquially internally refer to them as ‘anti-AI stocks’. They are stocks that have sold off heavily because AI is going to dislodge them.

In fact, we think that they’ve got deep moats and/or stand to benefit from AI – almost a complete polar opposite to the market narrative.

But importantly across all these themes – all the individual stocks that we express them in – all are profitable, they are cash generative.

The question is only one around valuation and growth – and possibly sustainability – where we think in fact that either they’re agnostic or stand to benefit.

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SIMON BROWN: Some of those ones you mentioned there are agnostic with deep modes. What are some examples in that space? It’s a wide space and, to your point, with lots of profitability and lots of decent-looking valuations as well.

KEITH McLACHLAN: Yes. There is the London Stock Exchange Group, LSEG. There’s S&P Global being dislodged. Both of these are data rich with deep reach, immensely embedded in systems that are processes and businesses and markets, et cetera.

There’s another one, Relx Group, which is deeply embedded in particularly the legal side of things.

Or over in France, there’s the world’s best effectively marketing agency, Publicis Groupe, which has launched its own AI platform.

There are some very interesting options out there that have sold off heavily, and for the first time in many years offer really good entry points. The important thing is to understand that some of these may indeed be dislodged.

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The market is very smart. Therefore control your position sizes here, nibble selectively. Not everything that is sold off is an opportunity. There are some value traps.

We think that these offer some interesting entry points, but we are controlling our position sizes.

SIMON BROWN: A quick last question, Keith. You and I have discussed this before, off air. It’s a weird little niche, but fairly concentrated. I mean I wear glasses and I’m going to be spending on glasses for the rest of my life – and there are many others like me.

KEITH McLACHLAN: Definitely. It’s not just an aging population whose vision is deteriorating our sight. But in fact, increasing screen time from a digital age compounds that even faster. Our sight as human beings’ primary sense is really inelastic. It’s economic-cycle agnostic. It doesn’t matter; you’re going to spend on it. But there are very few players here.

On the contact lens and surgical side, we like Alcon, which is listed on the Swiss market which, interestingly enough, has been off heavily because it has a fashion and European luxury element to it.

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And then, even tied in with tech and Meta there is EssilorLuxottica, which is the world’s largest glasses manufacturer and is offering a fantastic entry point. There isn’t a near competitor to them; they’re really globally dominant.

SIMON BROWN: Yes, absolutely. And to your point, eye care is changing. It’s no longer just ageing; it’s also screen time.

We’ll leave it there. Keith McLachlan from Element Investment Managers, always appreciate the early morning time.

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