Stock market: ‘Investors must pivot’ amid regime change, strategist says

Ariel Investments Head of Investments and Global Equities Micky Jagirdar joins Yahoo Finance Live to discuss the state of the market, rising energy costs, recessionary risks, inflation, investor sentiment, and the outlook for risk assets.

Video transcript

BRAD SMITH: It's time to forget about buying the dip and time to start selling the rips, as our next guest. Joining us now, we've got Ariel Investments head of investments and global equities, Micky Jagirdar. Micky, thanks for taking the time here today. You're clearly very bearish on the market despite the strong July. Why is this not the time to buy the dip?

MICKY JAGIRDAR: Well, thanks for having me, first of all. And I would just say that it's not that we are bearish on the market. It's that we are bearish on the investment style of the day. There is a regime change that is underway, and investors must pivot. I know they want Jerome Powell to pivot. But I think it is they who need to pivot, which is to go from what has worked for them for the last decade during the age of QE of buying the dip to now, where the Fed has pivoted towards QT, to now having to sell the rip.

And more importantly, rather than looking at trying to underpin the severity and the probability of a recession, which, in turn, will inform how the Fed may or may not react, we think that the market should rather, instead, focus on margins and market share. Why? First of all, when it comes to margins, the US non-financial corporate margin is at all-time record levels. Arguably, it has peaked.

And on every single earnings call, we hear most companies talking about how they are struggling to maintain them. We just heard the Jones report. And yes, there may be some softness there. But 10.7 million is still a very, very elevated number. And one of the biggest costs-- while energy costs and while supply chain costs may abate and may go up or down, labor costs actually has a lot of persistence to it. And so there's going to be some tremendous pressure on margins, and again, on top of the potential revenue pressure that may come-- may or may not come from recession.

So from that perspective, we would rather focus on companies that have the ability to overcome this margin pressure. And the one way to overcome that is to be able to have products that are going to be helpful in companies to deal with the costs and to help consumers deal with the costs, rather than be the ones that are adding to the cost. One very interesting example is Michelin, which is a tire company that caters to both electric vehicles, as well as to mining companies.

And we see that in both cases, the interest in electric vehicles, of course, has gone up. We are given the fact that energy prices having gone up. And more importantly, the commodity boom has also led to the requirement of miners to up the activity on what they need to spend on and develop. And both of these are actually oligopolistic competition markets for Michelin and where they are going to see their margins improve because these are higher margin products compared to what the company has in their historical traditional markets.

And as such, irrespective of what occurs with respect to the recession or not, we believe that you're better off focused on companies where the margin protection is a tailwind, rather than a headwind.

JULIE HYMAN: Micky, I want to get back to your picks in just a minute. But there's something else that you said in a note that I want to pick up on, which is that this is going to be a lost decade for US stocks, which, obviously, we haven't experienced in a long time, right? And so what does that mean to you? What does a lost decade mean? Does it mean sideways?

MICKY JAGIRDAR: It means that earnings are going to have a very tough time trying to grow from these elevated levels. One can debate about whether economic growth is going to be 2%, 3% over the next couple of years, but what we do know is that the cost pressures and margins having already peaked, in particular, the non-financial corporate margin having already peaked.

And again, we struggle to see how companies are going to, quote unquote, "get their costs under control," when you do not have the, quote unquote, "economic tailwinds" that are enabling you to grow into your market, as opposed to why you have to cut costs. In fact, one of the biggest reasons for this record peak margin that has been achieved since bottoming at around just under 5% in 2009 was predominantly because the companies cut cost, as they were enjoying the economic growth.

And the one thing I would point out is that this is very much true specifically for the US. So we would rather, in fact, have investors look at emerging markets where-- while the US is arguably a toddler with respect to dealing with inflation, emerging markets is the fully grown responsible adult and has seen and engaged and dealt with inflation for many, many decades.

BRIAN SOZZI: Micky, within this lost decade for stocks, you mentioned Michelin, but what else do you like?

MICKY JAGIRDAR: One of the other companies that we also like, as I mentioned, market share is another thing that one should focus on for investors, given the fact that it allows you to decouple away from what the economic picture and the macro support. And Nokia is another company where having fixed-- a key technological issue that the company faced against its competitors has today is now on the cusp of starting to gain market share on its competitors.

And because their customers are 5G CapEx investors in the telecom industry, you don't suddenly put a pause or shut down your 5G CapEx investment just because there's the potential for a recession. You have to put in those particular base stations and towers. And therefore, we believe that Nokia, one of the best vote of confidence that we got on this front is the company has put in a 600 million euro share buyback, which tells us that the company is confident in being able to achieve this market share gain and will leverage it with rewarding the investors.

BRIAN SOZZI: All right, we'll leave it there for now. Ariel Investments head of investments and global equities, Micky Jagirdar, good to see you this morning. We'll talk to you soon.

MICKY JAGIRDAR: Thank you.