Don’t play the market, but focus on fundamentals and valuations

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Erika van der Merwe (EM): The market is fixated with two things right now: the price of oil and the promise of artificial intelligence. And the consensus bet is that you need to own the most expensive stocks in the world to benefit from both.

Welcome to a new episode of the Robeco podcast.

EM: Well, my guest takes a somewhat different view. Chris Hart is portfolio manager for Robeco Boston Partners Global Premium Equities and we’ll get the detail from him. Welcome, Chris.

Chris Hart (CH): Thank you for having me today Erika.

EM: So, Chris, let's start with the energy angle. The conflict around Iran and the Strait of Hormuz has now become one of the biggest macro risks for investors – there’s supply disruption, inflation risk, bond market volatility. Now, as a bottom up, value-focused investor, how do you process such bigger picture macro factors? Do you explicitly consider geopolitics in your investment decisions or does it mainly come through in valuations and company fundamentals?

CH: It’s a great question because as a bottom up stock picker, I really focus on the companies themselves. But to say that I am, say, agnostic to what's occurring globally would be a stretch as well. There’s different levels of stress that enter into the market. Over the last several years, we've had two major geopolitical events, the Ukraine and then obviously Iran two times over the last year and a half or so. But what I'm really focusing on is I really try to identify the disconnect between company-level idiosyncratic inputs and focusing on the real economic effects of, I would say, more of a macro input – in today's world, that's oil and supply of oil, and relative to the underlying valuation multiples.

What we're doing today is similar somewhat to what we did during the Trump tariffs: really tried to synthesize down what's the real effect on the individual companies we own. Are they material? Are they marginally material? Do they significantly alter the medium- to long-term trajectory of cash flow and earnings growth? And then we make a decision. For example, during the Trump tariffs we significantly increased our tech exposure and US exposure. And then unfortunately we had a very short window to do that. But it increased our US exposure at that time by over 10% and the tech exposure as well.

Interestingly, over the last eight to ten weeks, I've not really seen any significant large opportunities or I would say pockets of opportunities that I would consider Iran-related. The adjustments in the portfolio have been much more AI-related, more so than anything else. I would say, from an Iranian perspective, there's obviously pressure developing. We're starting to see that in companies’ commentaries as we've gone through the first quarter earnings. From the portfolio itself, we've seen some weakness in European industrials. Interestingly, not as much in European financials as the market has been talking about. And, I would say the biggest weakness that we're seeing today is really consumer sentiment. The strategy is underweight consumer. Just because of – I would say – a general weakness that I see in the consumer over the last year to year and a half anyways.

EM: So, Chris, that's a great scene setter for what's happening and how you're responding as a stock picker. Honing in specifically on the energy aspect, fascinating to see that you were already overweight energy before the conflict escalated. You've commented now that you've not necessarily seen opportunities as a result of that. So going back, what was your original thesis behind that overweight positioning, and has there been any material change to that view since then?

CH: Great question. The strategy has, from a historic perspective, been always underweight energy. Historically, energy would generate cash flow and then spend all the cash flow on new acreage and essentially destroy capital as they increase its supply, pricing falls, and returns fall as well. That changed significantly about four or five years ago. And since then the strategy has been somewhat overweight energy through that time frame, but on a very selective basis, where we'd identify companies that exhibit strong cash flow and very favorable capital allocation, which is really saying that they were – they have been returning significant amount of capital back to shareholders, thus limiting, I would say, speculative investments in further acreage development.

So the positions that we are in going into this situation, we're all really based upon companies that were generating low teens type of free cash flow yields returning anywhere between 70, 80 and 90% of that capital back to shareholders. Really very different company dynamics or company structure. These businesses today are a lot cleaner, easier to model and where we are today, which is interesting, is that despite the strong performance of energy, these companies aren't discounting USD 100 to 120 oil in the price today or in the price of the stock today. They're still in the USD 70 to 80 range.

So from that perspective, our analysts believe that the underlying cost inputs are into development. The realization of pricing from oil today is still not reflective of where the oil prices are. So, therefore, we still think there's upside to target prices. Again, it's very idiosyncratic, very bottom-up. Whereas we understand what's going on from a macro perspective, it really comes down to what's the true economic effect of a global commodity on the cash flow of the business, and then ultimately how that cash flow is utilized from a capital allocation perspective.

EM: Still with the energy theme, but perhaps more from a top-down perspective. I understand you've just returned from a road show to the Asia-Pacific region. How are investors there responding to the Iran situation and elevated energy prices? Is there a distinct Asia-Pacific perspective on this, given that region's exposure as a net energy importer, and specifically, does what you hear there differ from what you're hearing in Europe and in the US?

CH: I think the most surprising thing that I heard was – I was expecting somewhat more of a panic but what I heard was the complete opposite. What I heard was more about patience. The conversation about energy really circled around: How long will supply be constrained? And I think the general outlook was by the middle to end of summer, there would be hope that there'd be some resolution and therefore supplies would come back to some semblance of normality. But we know that there will be a lag to that. Interesting as well that there was really no disagreement – from several conversations I've had with investors – that Iran was a very bad actor. I just think that there's unfortunately a price to pay to address that situation. The question is: What did that decision end up creating from a longer- to medium-term oil supply perspective? And it's not just oil. It's also LNG, which is obviously extremely important for Europe as well.

But, as I said, it just really came about across as kind of patience. But, from a fundamental perspective, I would say that from what I'm hearing from just companies’ reporting is that there is pressure, especially in the chemical complexes in Asia, more so than the chemical complexes in the US, which are pretty much, I would say, fully supplied. And then obviously pressures that are starting to emanate in Europe. It’s important to recognize too is that oil and LNG that were loaded onto ships in tankers at the beginning of the Iranian war are just getting to market today. So, the decline in supply and increase in pricing will start to become larger and larger pressure points through the summer. And obviously, I think if supply comes back on, there's there will be, I think, a period of increased input costs, but, be somewhat transitory, similar to what happened during the Ukrainian situation.

People forget that oil was well above USD 100 for five to six or seven months during the beginning of the Ukrainian war as well. And it was absorbed pretty well by many companies. Most companies that have large energy inputs are hedged through 25 to 26 as well. So, it's really a question, I think, as we get into late summer and into fall, if there's no resolution, I think it kind of changes the dynamic quite dramatically. I kind of look at this really as a binary situation. So it's hard to predict, obviously.

EM: Yeah. Now, you've touched on Europe a few times. Historically, energy price shocks have been a negative for European economies, including in the historical examples that you've quoted. You've been meaningfully overweight continental Europe and the UK. So does this current environment strengthen or complicate the case for European stocks?

CH: I think in the near term, I mean there's two ways to think about that. I think, as one said, it's somewhat of a binary type of environment where, obviously there's current pressures that are starting to emanate and increase in the supply chains and cost inputs. And if that gets resolved sometime over the next several months, I see that as being transitory. If it's not resolved over the next several months, then it starts to build. And as I kind of mentioned earlier, many of these businesses are pretty well hedged from a cost-input perspective.

We are starting to see some commentary from companies about raising prices through the summer to offset pricing inputs into the situation. But at the end of the day, as of right now, there's not much that I'm changing in the portfolio. I'm not overly macro. I'm really focusing on many individual companies that we're looking at or are invested in, European fiscal policies and net positive supports the general economy, wages need to remain somewhat stable to offset. Of course I think the consumer does get pressured a little bit as there's further inflation that's coming down the road. The question is how big is that inflation? And does it really impede or really significantly influence consumer behavior? And then ultimately, what ends up occurring from the profitability of companies that have a much higher level of sensitivity to energy inputs.

EM: Now, AI of course, is the other dominant theme for investors. For a value investor it could be unusually difficult right now to navigate the situation. In your opinion, are we looking at a genuine long term transformation thanks to AI? So a secular change in the way we live, work and invest. Or has the market simply run too far ahead of the fundamentals?

CH: I generally feel that the market's probably ahead of fundamentals at this point. Themes are usually associated with higher multiples and speculative and aggressive growth rates. You could always point to one to two or three companies that are very successful coming out of, I would say, new technology, but there's a significant AI infrastructure behind what will – I should say – that’s behind the bigger companies that we all know about, that are really baking in secular growth characteristics that I'm not necessarily sure do not revert back to a cyclical nature over the next one to two years. As they would say, the infrastructure of AI is rolled out.

There’s aspects – I would say – of AI that, again, are secular. I think everyone should try to implement it one way or the other into their business. And then there's an aspect of cyclicality as well, from an infrastructure perspective. And I think what we've seen, especially on a year-to-date basis, is the market's somewhat pricing in that the AI infrastructure is a new secular grower. And when you start to look at the growth rates, especially when you get further out, and which is somewhat outside of my view of being able to predict the future, which is very difficult to do. You look at 28, 29 to even 2030 numbers and you see these massive growth rates. Now of course, there's new uses, new markets, but often there's a few of the names of the winners. And you have to be able to pick those winners and those are often outside, I would say, the value framework that I utilize to pick stocks.

EM: So what would be the winners from a value perspective within this realm of AI?

CH: I think they've already all run, to be honest with you.

EM: So, none?

CH: There's not much left. If you think about it. I mean, it was originally industrials that were kind of ran up two or three years ago. You have even particular construction companies that are now trading at multiples that are exorbitant relative to what I would deem as unsustainable growth expectations. And then you get into, I think, some of the more value-oriented tech area where it's become very speculative. And I would say it's become – I mean, we all know that what's happened in the semiconductor and memory space over the last two and a half to three months, and, one way, it's spectacular. The other way, it's highly questionable: are those numbers two to three years out rational?

I mean, what's interesting, if you think about it and if you really do some more digging, is that one aspect, 50% of the backlog at Microsoft, Google, Amazon, Oracle is from OpenAI and Anthropic. Now, what's interesting about that is that a more skeptical analysis would be, where's the capital coming from to grow that business? I mean, OpenAI came out several, you know, two weeks ago, made some cryptic comment, which then, of course, they had to walk back about not having enough capital or generating any types of profitability to support their spend.

If you do some more digging, you find out that arguably there's enough data out there starting to show that 50% of data backlog likely won't get built going forward due to lack of funding, power constraints, water constraints, a myriad of local issues that really draw into question the entire multiple associated with the AI complex. And if growth rates were predicated on, say, 100 data centers last year, and as we're going moving forward, 50% of those won't get built. The question is, what are those numbers? And I'm not saying that agentic AI would not have an impact – a significant positive impact for many businesses. But from an investment perspective, it's about multiples and addressable market in relation to the cap afforded those companies.

And it's, again, you go back and you look at the trillions of dollars that proposed and needed to be spent to address the target market that not only Microsoft, Google, Amazon is focusing on, but you also have well over 50% of demand coming from REITs that specialize in data centers. And then you have a whole speculative element of data center build as well. And that's where the that's where the big question comes in is because it's not just Microsoft, Google, Amazon spending.

EM: It’s way broader.

CH: The majority of the spend has actually come from arguably just speculative land building, as you would, I would call it. If you think about it, it’s somewhat like an energy build. You just all of a sudden go out and start acquiring acreage and you start to dilute the returns. So I am somewhat skeptical about it. Just from the market cap perspective. And from an investing perspective, it doesn't come down to whether or not it's useful for businesses. But I will say, you know, the majority of the companies that we speak to, it's somewhat of an efficiency tool. It's a cost benefit or reducing cost in the business. But, very rarely have I heard anything from a revenue generation perspective. So it’s open to question.

EM: Chris, I have to ask perhaps a little provocative. Do you have any regrets? Because a skeptic might say that value investors have spent two years underestimating just how durable the AI winners could be?

CH: Well, it's interesting because, one, if you think about, Nvidia, it was never a value stock. That was a company that was set into a very different style. We did have significant exposure to, I would say, the value technology side. So a lot of memory, semiconductors that, up until recently, we had pretty sizable positions in, we only trimmed a significant of the amount of those holdings out of the strategy end of last year, as I looked at multiples, I looked at the growth rates that were being baked into those multiples. And, arguably maybe I sold them too early. But they wouldn't be in the portfolio today based upon where they are.

They would be being trimmed heavily out, somewhat similar to the Rheinmetall holding in the strategy that we had for a number of years that obviously we held that stock due to the non-defense business, which, all of a sudden became the driver of the business after the Ukraine situation, and then we had to sell it because it ceased to become a value stock.

Now, what's interesting is that from a security selection perspective our financial holdings has outperformed the AI complex, and that's stock picking. As an investor, it's about finding the most mispriced securities. And often those are going to be names or opportunities that are on the front page of the paper, day to day. No one wants to go in and no one wants to go in and talk about, “My manager outperformed by owning European banks.” They want to talk about, ”My manager outperformed because we held Nvidia and a whole host of other AI complex names.” But at the end of the day, it's about returns. And I see myself as an investor. I don't play the markets. I rely upon focusing on individual companies’ fundamentals and valuations and try to generate returns from multiple expansion from businesses that are mispriced.

EM: So having mentioned financials, how you are seeing opportunities there as a result of that. We see that financials represent your largest active overweight at a sector perspective. Is there a core thesis or is it indeed simply as you say, you’re seeing those opportunities at the at the bottom-up level?

CH: Yeah, it's interesting that particular sectors are held at different standards than other sectors. The success of our financial holdings and specifically our European bank exposure over the last three years is at the crosshairs of “you have to sell European banks because they did well.” Well, cynically, if you think about it, why doesn't the same apply for technology? Our European banks, again there's value there. We still see the value remains after a strong 2025 performance. We built these positions in 2022 and 2023. What we still see today is stable net interest margins. There's good hedging that these banks have done in order to maintain a stable net interest margin.

Even going through 2025 was somewhat of an air pocket, but 2026-2027 hedging is good; solid low- to mid- single digit loan growth. Which in some way, if you think about from a macro perspective, it's interesting that they're able to grow loans at that level. At least the banks that we own relative to the macro, which again, is why I don't pay attention to macro because the banks would tell you something different. Fees are somewhat volatile, but that's not a major concern. They always are. Solid efficiency characteristics lead to high single-digit EPS growth. Lower leverage today versus history. Solid return on assets since very supportive valuation.

Arguably these banks had 50%, 60% to 70% upside two and a half or three years ago. Today, there are still 20 to 30, which is still solid from a return perspective. Today from a European bank perspective we’re probably double weight European banks relative to the value index. I would say we’re overweight insurance – insurance offers stability. It’s interesting when you look at the underlying book value growth of insurance through time, it gets the valuation multiple that it does. It should trade at a higher multiple in my view. That's always a source of stability. And I would say sneaky growth in the strategy or a generator of alpha.

US banks: probably fairish value, some opportunities there. Still slightly underweight US banks. And it comes down to the multiple. And I'm also not a relative investor. I think about the absolute metrics of individual companies that drive my decisions. So I could be overweight both US and European banks if valuations, EPS and returns point to opportunities. Again, it's about individual pick. It's about individual stocks.

So actually it's interesting today there was a Bloomberg article that came out. It’s all true, but it's somewhat superficial. It doesn't really create – I would say , it's devoid of deeper analysis. And the point of the article is that, yes, if oil remains a plus USD 100 through the fall, you know, we'll see a slowdown in the European economy. They made mention of increased credit provisioning. Fact is, though, that increased credit provisioning that we're seeing in the first quarter is still de minimis. It’s somewhat prudent. But the article makes it sound as if the sector is ready to implode.

Because again, this has become kind of like the, I would say the linchpin of, “Okay, European banks did great for one year, but God forbid that they do well for two years now.” Obviously we're watching credit very closely. But you know, the Iran situation is binary. And I am expecting some credit deterioration, but not one that would end up altering the current risk reward from their earnings growth relative to their current valuation levels.

EM: Now, Chris, the strategy has performed strongly in recent years, and you now manage more than USD 8 billion globally. What aspects of today's environment are most supportive for your investment process and where do you still see the biggest challenges?

CH: Yeah, I mean, it really comes down to idiosyncratic. I mean, opportunities present themselves whenever a macro comes into play. Today what we're seeing, the biggest opportunities in the strategy not only just discussing what we just did about financials, but, we've taken advantage of, as I mentioned earlier, more of the AI negativity. We have found a number of stocks, we probably have about I would say probably five to eight, call it maybe high single digit percentage of the strategy today. And companies that have been dramatically affected by, I would say, the potential of being disintermediated by agentic AI.

We've looked at those companies quite in depth and we came to the conclusion that the chances of their current levels of returns and growth are not going to be significantly impeded, if any at all, from agentic AI. These are companies that used to trade at high teens, low 20 times multiples. That would be outside my valuation constraints. When I think about what value is, these stocks fell to mid to low teens multiples. We really like them. So far through earnings, they've all hit the targets. There's been no signs of that deterioration. The market has, I think, created this kind of narrative of trying to disprove the negative.

And that's one pocket of where I'm finding opportunities and it's really across sectors. I mean, there's areas of financials where apparently agentic AI is going to disintermediate brokerage and banking businesses. Obviously within technology, there's other areas of IT services that are apparently going to be completely displaced. There’s areas even within our industrial space that has had the same dynamic. And again, we just look for companies that have strong moats. We think businesses are mission critical to their end users or their current customer base, such that that current customer incentive to switch is probably rather limited when you think about it, and when you think about what a potential company provides.

Some issue that we're facing, especially from, I would say, more on the inexpensive technology side on the IT services, is that, you know, in 2025 there was a slowdown in corporate IT spending. The bears in the market took that as meaning that there was an agentic AI now displacing these businesses. “Look at the slowing growth rates.” I think it's coincidental. We’ve seen, one of our holdings where the underlying last two quarters have been positive. They're showing organic growth. They’re being quite specific about where that growth is coming from and the limited effect that AI has on them.

In fact, AI is actually a benefit for them. AI is very complex. It's not as simple as the cloud. It's about business process. So it requires a lot more inputs than just moving your storage off from on-premise to off-premise. So there's a lot of complexity there. And I think that that the biggest opportunities that we've found recently has come from the negativity or, say, the draconian view of many businesses being able to compete against as I always say, some guy in a garage who's created a new business model with agentic AI.

EM: Chris, great talking to you. And also good to hear that you are clearly sticking to your value investor principles and still seeing plenty of opportunities in your investment universe. Thank you.

CH: Thank you, Erika.

EM: And thanks to listeners for joining us for this episode. If you've enjoyed this discussion, please subscribe and share the podcast within your network. Stay tuned for more investment insights in upcoming episodes available on all major podcast platforms and on the Robeco website.

Thanks for joining this Robeco podcast. Please tune in next time as well. Important information. This publication is intended for professional investors. The podcast was brought to you by Robeco and in the US by Robeco Institutional Asset Management, US, Inc., a Delaware corporation, as well as an investment advisor registered with the US Securities and Exchange Commission. Robeco. Institutional Asset Management US is a wholly owned subsidiary of Orix Corporation Europe NV, a Dutch investment management firm located in Rotterdam, The Netherlands. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFs for the Netherlands Authority for the Financial Markets in Amsterdam.