Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Mike Coop. He is Head of Portfolio Management at Morningstar Investment Management. Hello.
Mike Coop: Hi, Holly.
Black: So, you've come to fill us in on the details because the NASDAQ stock market has hit a record high this week. What's going on?
Coop: Yeah, it's been an eventful week. Overnight we had pretty big falls in the US market. But up until then we've had a large surge following on from the employment data that came out last Friday which was much better than people were expecting and that triggered a rise in all markets. That's the near-term picture. The medium-term picture is, of course, we've had markets rallying strongly since late March in response to the amount of policy stimulus and people have looked through the economic data which has been pretty dire and been prepared to look beyond that in the expectation that there would eventually be some form of recovery.
Black: It seem a bit bonkers that in the midst of this pandemic situation that we're all in and we just found out that UK GDP fell 20% in April but we're seeing the stock market hit a record high.
Coop: Yeah, it's the forward-looking nature of markets as ever which is the reason why there's this disconnect between what you are seeing in reported economic data today and what investors are thinking about in terms of paying up for future earnings and thinking about what that future might look like. Some of this reaction is an expectation on the kind of the glass half full side that will mean that there will be a pickup in economic activity and also that people are pricing somewhat in a scenario where there's a likelihood of a big second wave, if you like, is fairly small. So, that's in our view how markets have been reacting.
Black: So, the Nasdaq is often talked about as this index is where a lot of the tech giants sit, and we've seen those stocks do really well. What is the outlook for that sector from here in your view?
Coop: Clearly, what's happened has benefited firms who operate primarily through the internet in terms of the sales whether it's an Amazon or whether it's a Google through people using those platforms to a greater degree. At the same time, the traditional bricks and mortar part of the economy has been hit pretty hard. So, you have two shorting factors if you like that have increased the demand for those types of companies. The question, of course, is what does this mean from a longer-term outlook and what should investors be prepared to pay for these companies given how much prices have already gone up.
Black: Well, that is the million-dollar question. What would you say to someone who is feeling quite inspired by the rally to start investing now?
Coop: It's very hard for companies to continue once they've become very large and dominant to have a high growth rate going forward that was the same as in the past. And we know that there's rising competition, we know about this greater regulatory focus and there's greater taxation focus. So, it basically means that at current prices the odds are stacked against that this happening again. Even though clearly there are oligopolies around these industries which generate much higher levels of profitability and you have to recognize that in assessing your fair values. But as we look at it today, the odds are stacked heavily against you making money in the way you have and in fact other sectors look to us on a long-term view far more attractive when you take into account the current prices.
Black: Mike, thank you so much for your time. For Morningstar, I'm Holly Black.
