Christopher Johnson: Welcome to Morningstar. Today I'm joined in the studio by Nicolo Bragazza, the Associate Portfolio Manager at Morningstar Investment Management. Nicolo, thank you so much for being here with me. My first question to you is, what has led the market sell off?
Nicolo Bragazza: So, I think we are really talking about the drama in three acts here because it started first with the Bank of Japan, hiking rates unexpectedly. Then the second step was the Fed being a little bit more dovish than what the market expected. And then the week ended with a very disappointing job report. And so, these three things together caused the market sell off that we saw because of the moves on the Japanese yen. First, the unwinding of the carry trades and therefore the impact of debt on tech stocks and stocks with high valuations more generally.
CJ: And on tech stocks, could you argue that maybe the tech and AI bubble has finally burst?
NB: First of all, it's difficult to say whether there is a bubble or not in AI stocks and this is because differently from the past, for example, the dotcom bubble, these companies do generate revenues and earnings, differently from the previous examples of a tech bubble. But definitely we can say that valuations are very rich at the moment and therefore these companies are very exposed to market sentiment as we have seen over the last couple of weeks.
CJ: And what sector opportunities are you seeing in the near to long time because of the sell-off?
NB: Yes, so at the moment in our multi-asset funds, we are generally positioned with a longer duration than usual, especially in the most conservative portfolios we have been for a while. We have had a position, a dedicated position to the Japanese yen as well because we thought that the valuation, the exchange rate of the currency was not reflecting anymore, the actual fundamentals of it. And also we have been having, and this is for some time, an underweight to tech stocks, especially because of the very high valuations that we find there. We prefer instead of tech stocks, communication services as a sector in the U.S. We think that those companies have more attractive valuations with similar growth opportunities ahead. And also we like the defensive stocks more generally and especially utilities that have been rallying in the last couple of weeks because of the reduction, the decreasing interest rates that we've seen across the board.
CJ: And I just wanted to also ask you about UK equity. So, it appears that they weren't hit as hard as in comparison to maybe other global markets. So, what was going on there as well?
NB: Yeah, it's always difficult to draw conclusion about the UK market because it's a collection of big global companies, so companies generating revenues abroad that are in this index and come from very different sectors. Generally, we can say that the UK market has a strong exposure as a whole to health care and consumer staples. And those sectors tend to do pretty well when there is an equity recession led sell off in equities or where there is a change in sentiment across the markets.
CJ: And after the sell off, what do you think the Federal Reserve will do next? They've been almost backed into a corner.
NB: Yes, so the Federal Reserve has been delivering a more dovish message at the last meeting. We think that generally the Fed will probably cut in September. But I don't think that a cut in September is a radical change. If they had cut in today, it wouldn't make a huge difference, honestly. I think it's just a matter of waiting for it and it will happen sooner or later.
CJ: Is there anything else you'd like to tell me that I haven't covered in the interview?
NB: So, I think the most important thing is to focus on the long term. We are valuation driven investors and we focus on the long term. So, when we see moves in the market of such magnitude, it's important to think whether something has changed, first of all, from a fundamental perspective. And if not, maybe it can be an interesting entry point because of better valuations compared to the previous phase in the market.
CJ: Nicolo, thank you so much for being here with me.
NB: Thank you Chris for inviting me.
CJ: This is Christopher Johnson from Morningstar UK.
