The US economy: the glass is half full

I’m Sam Slator from FundCalibre, and today I’ve been joined by Maneesh Bajaj, manager of the Brown Advisory US Flexible Equity fund. Thanks for joining us today.

[00:10] It’s a pleasure to be here.

So, the US, [there’s] been a lot going on. We’ve had banking woes, the debt ceiling went to the 11th hour, we’ve had mixed data, inflation’s been high, as it has here in the UK. What’s your view of the economic situation and how are companies actually faring with everything that’s going on at the moment?

[00:31] Sure, you’re right about lots happening around us and you pointed out to some of the concerns. And yet, so far this year, the markets have been pretty strong, and they have fared pretty well. But the fact of the matter is that there is a real effort to slow down the economy and that’s why the Fed [Federal Reserve] has been on this [interst] rate rising path. So, things are slowing down and [are] likely to slow down, but we are in a situation where it’s very hard to make a call as to what’s going to transpire. And there is a case to be made where the glass is half full, and there’s a case to be made where the glass is half empty, and you’ll find many, many thoughtful and reasonable people on both sides of the aisle.

So, in terms of glass half full, the consumer so far has been very strong, the spending is strong, the employment data continues to be strong. We’ve had a cycle where interest rates have gone up more than 500 basis points [5 per cent], and the unemployment figure has moved from 3.5 to 3.7, so not really too much of a damage there. And then, you know, consumer balance sheets are still very healthy and there is a view that the Fed is towards the end of its interest [rate] raising cycle. And so far this year, the companies have fared well to your question, they’ve exceeded expectations. So, companies themselves are navigating this environment.

And then there’s a case to be made that the glass is half empty. And here, interest rates are very high. There’s no doubt there is constraints on borrowing capacity, and people are fearful that so much of money, which the consumer was having, is dwindling, and there have been tighter credit conditions. And then recently in the United States, there are concerns related to commercial real estate and people worry about the contagion. So, there are enough worries, but it’s never been that clear. I mean, think about it, what we have just gone through, the pandemic, and yet we have overcome it, we have done well and our bet is that there would be a slow down, but the kind of companies we own and the society will continue to make progress over time. So, hopefully whatever happens is going to be short-lived. So we are in the camp of certainly ‘glass half full’.

And as you point out, the stock market’s actually done pretty well. The S&P 500, at least in dollar terms, is in bull market territory. One of the things that’s been exciting investors and certainly journalists writing about it, has been AI and the advances that have been made and the potential there. What’s your view on this? Is it something to be excited about now or something for the future?

[03:23] I think it’s really exciting, and this is in some ways revolutionary technology and we’ve never seen that happen, what generative AI can do, so we are really looking forward to how this world unfolds.

There is undoubtedly one clear winner and the market has been quick to recognise the winner, and that is NVIDIA [Corporation], but the other companies like Microsoft [Corporation], which are going take advantage, which are taking advantage of generative AI and incorporating it in their products and, as it happens, chances are we are all going to be more productive writing, creating spreadsheets or maybe creating PowerPoints and writing documents. And the impact of AI is not going to be limited to that alone. We are seeing in the healthcare space where there are talks of new medicines being discovered using generative AI, radiology being more effective because of AI. It’s early and our view is that companies that have data, good data, and who can harness the power of the technology are going to be benefiting from it. We have companies in our portfolio that have that data and tech advantage. When we think about Microsoft, which is the biggest position in the portfolio, when you think about Amazon [.com, Inc.], Google [Alphabet Inc.], we also have companies in the healthcare space United Healthcare [UnitedHealth Group Incorporated], Elevance [Health, Inc.]. So, we do think that companies are going to benefit, humanity’s going to benefit, and productivity is going to be higher. So, it’s exciting.

And you’ve mentioned there NVIDIA and the fact that it’s done exceptionally well this year, another one that’s done well has been Meta [Platforms Inc], which is up over 100%, it’s one of your top 10 holdings. Have you been taking profits from it? Do you still hold it?

[05:09] So, when we are making these investments, our view generally is longer-term. And we have held Meta for some period of time, and for a period of time leading up to 2021, the stock did fantastic and then it suffered during 2022. And part of it is that profitability for Meta went down. And they’re taking measures to improve the profitability; this is the year of efficiency – that’s how Mark Zuckerberg has described it. And we are seeing good results. And as a result, the stock has climbed quite a bit. It’s the best performing stock in the portfolio. Very recently, we took some profits and not for the idea of taking profits alone, it’s also allocating capital to more compelling parts of the portfolio. This is something which, you know, which is a constant evaluation, which we look at. We do think that it’s much richer than what it was, but it’s not an unduly more expensive stock. Facebook is another one which could benefit from AI. As I mentioned to you, this is another company which has a lot of data on all of us, whoever [the] 3 billion people [are] who go on the platform daily, and we’ll see how Facebook benefits from AI.

And another one of your holdings, which I’ve been using a lot recently is Booking.com. What do you like about that one?

[06:34] Don’t we all love Booking [Holdings, Inc.], and especially in this time, everybody wants to travel. I think Booking has built a great platform for the consumer and even for the hotels, where there is one place where consumers can go and plan their vacation, think about the hotels, the offerings, you can see the reviews and this is a powerful brand and especially in Europe, they have such a huge market share. So, it’s a great business. It is a low capital intensive business. It has very high return on capital. It has a very strong consumer proposition. And you know, it is a nice agency model. So, we have liked Booking for some period of time. This is an interesting area. People love to travel [and] our view is that travel will continue to increase.

I heard a statistic, which I’m not a hundred percent sure of, that 80% of the world population has not taken a flight yet. [SS: Oh wow.] I think I heard it right, but I can believe this to be true. So, there’s a long runway for travel and especially when we live in the social media world, it benefits travel. People want to experience different places. And especially now we are in a period where so many of us have been confined to our homes, where people want to step out, travel and Booking is in a great spot for that.

The company has continued to innovate. Now they have you know, you can book your flights, they have a vision of connected travel – it’s early [in that development] – where you can meet all your travel needs on that platform, booking a hotel, booking maybe an excursion, booking your restaurant, making your flights, and having that at one place. So, we like Booking. They have high return on capital as I mentioned. They have a good plan of buying back shares, which we care about. So, a good business and something we’ve owned for some period of time. So, we like it.

Definitely. Well, I’ve booked my flights, my hotel and my car rental through it recently so being able to do the excursions would actually be quite nice. Well, thank you very much. That was really interesting.

[08:49] Thank you very much for having me. Enjoyed it.

And if you’d like to find out more about the Brown Advisory US Flexible Equity fund, please go to FundCalibre.com.