Why the market is headed for a “regime change”

Ariel Investments’ Micky Jagirdar joins Yahoo Finance to discuss why he thinks we are at the cusp of a regime change in markets, as well as the shift towards market share growth over end market growth.

Video Transcript

JULIE HYMAN: This is Yahoo Finance Live. We're looking at a potentially mixed open here this morning. Dow futures, very little change, slightly to the downside. We've got NASDAQ futures and S&P pointing to a higher open over-- after what has been a negative week for big tech stocks in particular and risk assets sort of more broadly.

We also, I should mention, got some economic data this morning that showed personal spending, showing a big increase of 10% helped in part by the stimulus checks last month. At the same time, the so-called PCE, that's a key measure of inflation that the Fed watches, ticking up a little bit, 1 and 1/2%, still below the 2% that policymakers are targeting. Let's talk more about what all of this means for the markets and are we at a sort of pivot point or was this week maybe just a pause or an anomaly?

Micky Jagirdar is joining us now. He's Ariel Investment Senior Vice President and Head of Investments and International and Global Equities. He's also a Co-Portfolio Manager. Thank you so much for being here, Micky. So how are you thinking about this question of what this week meant? Or did it not mean anything in the sort of longer trajectory of the market?

MICKY JAGIRDAR: Yeah, thank you for having me, Julie. You know, we think more than just this week alone, it's been a slow boil to this point. Fundamentally, we do think the market is headed for a regime change, and what has worked in the past decade is unlikely to work in the next decade. Specifically, the easy money that was made by buying cheap beta funded by the view of lower-for-longer on interest rates fundamentally is unlikely to work in the next decade, which is, in our view, much more likely to be a function of idiosyncratic alpha generation by being able to specifically pick stocks.

That's how we see this going forward. And we think we got a bit of a preview of that when the market, for the first time, has had to think about what does it mean if interest rates were to start ticking higher as opposed to the last decade where we have been expected to do and most expect stable, if not declining, interest rates.

EMILY MCCORMICK: And Micky, when you talk about generating alpha and picking stocks specifically, one of the tips that you mentioned was choosing market share growth over end market growth. And I'm wondering for investors, what metrics do you usually use to actually determine who are going to be those market share leaders?

MICKY JAGIRDAR: So taking a step back, what underpins market share growth is the ability to-- and to identify a competitive advantage that the particular business has. And to-- to give you an example, we've looked at the tire industry, which interestingly enough, people don't appreciate this, but it's actually future proof. It does not matter whether combustion engine has a longer life in the marketplace or whether electric vehicles are going to be the mainstay within a short period of time, you need tires. And the tire-- when it comes to tier one players in that particular industry, there's only a few, and they have been gaining share over the lower tier, because the kind of specs that are required to serve this market are actually increasing in complexity.

And so that's one flavor of what we like to kind of indicate with identifying that competitive advantage, and that's what underpins the ability for this market-- for this company to gain market share or not. And I'm referring here to Bridgestone, which is a leading tire manufacturer in the world and one of the few in the tier one categories. And again, as I mentioned, it's future proof. One can have all sorts of views in terms of how the auto industry is going to proceed going forward, but all of those are going to require tires.

BRIAN SOZZI: Yeah, Micky, you should see the tires on my car right now. We need an infrastructure bill, because these roads are terrible. We just had the opening bell on Wall Street, seeing some mixed action out of the gate here. Kensington ringing that opening bell, the folks there looking very excited on this Friday morning.

Micky, I do want to ask, you know, we had personal income and spending data out this morning, very strong. One number that stood out to me, personal savings rate, the personal savings rate at 20.5%. At this point, how do you not just back up the truck on cyclical stocks?

MICKY JAGIRDAR: Well, and I would go back to the dynamic of there is opportunity in stocks that is driven by fund flows and by allocation of the money on the part of consumer, because their wealth has-- has increased, and their personal incomes have increased. However, what we think is companies that have a specific value that they offer to the consumer will be a disproportionate beneficiary, not only when the consumer goes to spend that cash, but also, should the consumer consider and have the opposite side of it, we are very risk aware investors. And so we are always thinking about what can go right and what can go wrong.

And so in the event where, let's say, the stimulus is going to be a short-term effect, at some point that-- that will be not a permanent feature of the market. And so if the consumer then decides to pull back, we want to make sure that we're not left with a company that's dependent on stimulus money to be able to keep its revenue growth going. And that's, again, where competitive advantage and market share capability comes into play to the extent that you are something that the consumer favors and is a necessity. That's-- that's what we would like to skew towards as opposed to just what the flavor of the day in terms of where the consumer spending their money is.

JULIE HYMAN: And you need tires, eventually, on that front. Thank you so much, Micky. Micky Jagirdar is Ariel Investments Senior Vice President and Head of Investments for International and Global Equities and a Co-Portfolio Manager of Ariel Global Concentrated.