Innovative sectors such as artificial intelligence (AI) can generate investment returns over the long-term, but too much optimism may presently be priced in, according to Mike Coop, European chief investment officer at Morningstar Wealth.
Meanwhile, others see opportunities in different parts of the market where the hype has been less pronounced.
Coop says that with any investment there are a wide range of possible outcomes, from the most pessimistic, to the most optimistic, with those being low probability events.
"But the key is to invest when the sentiment is pessimistic, because at that valuation, it is not that it changes the range of probabilities, but it means you don’t need the most optimistic of the range of scenarios to happen in order to make a return on your investment," Coop adds.
He says many investors remember the period between 1999 and 2003, as being a period of “euphoria”, and compares that to present market conditions.
Coop adds: “That period of euphoria, just because sentiment was strong, that doesn’t mean there weren’t good companies then alongside the bad ones. But if you waited and bought in 2004 instead of 1999, when valuations were lower, then the probabilities were more in your favour.”
He believes present market conditions are more akin to those of the 1999-2003 period than the buying opportunity period of 2004.
The chief investment officer is also sceptical of the significance of higher interest rates on the investment case for these assets.
He feels that rates move up and down over the course of economic cycles, “and fund managers who are using that as an excuse for losing money, well I think it’s nonsense. Interest rates move up and down over the course of economic cycles, so aren't very important if you are a longer-term investor. I think f you got those fund managersin a dark room they would admit that they simply overpaid for some assets.
The sharp falls in the valuations in 2022 did prompt Coop to invest in some tech shares based on valuation, but he feels the advent of a new wave of a hype cycle, focused around artificial intelligence, means the valuation case that may have been emerging in 2022 has evaporated and we are back in a period where the risk to reward calculation is not attractive.
In terms of understanding where sentiment is at any one time, he uses fund flows data.
Coop says the second part of the calculation investors have to make is around which innovative companies will emerge as the winners.
His view is that: “when a new theme emerges, the key things to ask are: “What value can be created by this innovation, and of the value that is created, how much of that value can be kept by the company that creates it."
One of the mistakes, he says investors make, is to assume that just because a company has an advantage today, it will always have an advantage, or that because something is a trend today, it always will be.
