Talking Heads – Maintaining discipline in volatile times

Talking Heads with Guy Davies

Daniel Morris: Welcome to the BNP Paribas Asset Management Talking Heads podcast.

Every week Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode, we’ll be discussing the outlook for equity markets.

I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Guy Davies, CIO of Fundamental Equities and Deputy Head of Investments. Welcome, Guy, and thanks for joining me.

Guy Davies: Thanks very much, Daniel. Good to be back.

DM: We’ve had a pretty interesting April. Let’s try to assess how things have changed for equity markets post the ‘Liberation Day’ announcements by the Trump administration. After the initial shock and awe that led to fairly significant declines, the last I checked around 40% of the markets were above their April 2 level. We appreciate that the macroeconomic outlook is different than we thought it was going be before the announcements. Has it affected how portfolios are taking risks these days?

GD: As you would expect from previous discussions we’ve had in similar circumstances, we haven’t changed our investment philosophy or underlying investment processes. We utilise the recent volatility to focus on improving the quality and return potential of our portfolios.

That means opportunistically adding to higher conviction ideas that may have dislocated from our view of intrinsic value. That needs to be put in the context as well of finding durable business models, including those with scale, operational flexibility, power over suppliers, pricing power. It’s particularly important in the current environment when we are so focused on tariffs, but it’s always part of our process. Similar to previous periods, it’s very much a time for calm, considered decision-making.

You have four elements. Retaining perspective. Acknowledging what you don’t know and focus on what you do know. Remaining consistent. So having the courage of conviction. Stay the course with your philosophy and your process. Be disciplined. Focus on earnings.
Recognise the value of diversification. And finally, avoid kneejerk reactions. Take a step back, be nimble and open-minded. Take profits when you can, but also have the courage to buy corrections. One thing we have done is we’ve tried to keep our power dry.

DM: You rightfully highlighted the importance of earnings when it comes to looking at the outlook for equities. Global equities reduction in earnings per share expectations for 2025 [are] just 3% lower. So, broadly, one would imagine supportive for equity markets. You also
mentioned dislocations creating opportunities. Are there any particular areas where you’ve really noticed that over the last several weeks?

GD: We’ve been finding opportunities across sectors and industries through rigorous fundamental analysis. For example, if we look at our diversified US and global thematic strategies, we’ve been incrementally trimming those companies perceived as low risk defensive, those that are approaching fair value given recent strength. Examples there would include utilities, waste companies, grocers, P&C insurance, so low earnings volatility businesses that performed particularly well.

We’ve incrementally funded higher conviction ideas that have unduly sold off on concerns of policy uncertainty and or slowing economic growth. Examples [are] tech, industrials, innovative healthcare.

This is entirely consistent with our approach to active management. If anything, these barriers provide us [with] more fertile opportunities than when it’s plain sailing.

DM: You mentioned growth in technology and of course that’s been an area of particular interest. If we look at the most recent US GDP data, one of the very positive aspects of it was a significant increase in business investment. Almost all of that came from information technology equipment and seemed to validate the view that this capital spending that we’ve read so much about is starting to show up in the numbers. If you think about the tariffs, the geopolitics, has this changed your view on the prospects for tech or AI more specifically?

GD: We remain bullish on the prospects of technology and of our technology sector holdings more specifically. After the recent market pullback, in our view, valuations are more compelling. We see significant upside for the majority of our technology holdings. We’re actively reviewing models for tariff impacts and slow economic environments and slow growth. But in most cases, the stock pullbacks are overreactions.

This speaks to those four points: perspective, consistency, discipline and avoiding kneejerk reactions. It’s worth taking a step back. Digital transformation remains an imperative for so many companies across all sectors of the economy. Introducing new products and services to
help transform business models and increase efficiency. Cloud AI, the internet of things, automation remain as compelling today as they were before Liberation Day. They should catalyse the wider adoption of technology across the economy.

We’re still in the early innings of the AI theme. There’s significant potential for broader company adoption of large language models and generative AI in the remainder of this year, but also over the next sort of five or 10 years. Most of the cloud players investing in AI infrastructure have cost effective solutions and offer paths to positive returns on investment.

The major players have all reiterated increased capex plans for the full year. So, the fundamentals remain solid and supportive for AI enablers and beneficiaries. These kind of fundamental thematics aren’t wiped out because of volatility. If anything, the volatility in prices and valuations offer more interesting entry points.

DM: If I can summarise what you shared, what’s happened over the last month or how you’ve reacted to it was to try to find opportunity in volatility. When you have these dislocations, big changes in valuations, that’s an opportunity from your point of view to increase allocations, particularly to quality stocks at a more attractive price. Well, Guy, thank you very much for
joining me.

GD: Thank you, Daniel.

Daniel Morris: That’s it for this week’s episode of Talking Heads. If you would like more information about our capabilities and equities, please reach out to your BNP Paribas Asset Management contact or check out viewpoint, our website for investment insights @
viewpoint.bmpparaba-am.com. Viewpoint brings commentary and analysis in a variety of formats, from investment outlooks to asset allocation videos and podcast to help investors make better informed decisions. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Daniel Morris, and Guy Davies, CIO of Fundamental
Equities and Deputy Head of Investments. Please do join me next week. Until then, take care.