Why a crisis is brewing in US markets

Sean Peche, who runs the Ranmore Global Equity Institutional GBP fund, explains why the state of US markets is keeping him up at night and looks at what might bring him back to the region.

He also touches on the investment themes at play in the fund, beyond a focus on price.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Dave Baxter, senior fund content specialist at interactive investor: Hello and welcome to our latest Insider Interview. My name is Dave Baxter, and joining me today is Sean Peche, manager of the Ranmore Global Equity fund. Sean, thanks for coming in.

Sean Peche, manager of Ranmore Global Equity: Dave, thank you. It’s great to be here. Thank you for the opportunity.

Dave Baxter: You don’t do macroeconomic forecasting, but you do talk about the fact that crises can yield opportunities and something can always go wrong. With the caveat that, of course, we sadly don’t have a crystal ball to hand, what potential crises are you mindful of as we go into 2026?

Sean Peche: Well, I think there’s a crisis brewing in the States, and I think there’s a crisis brewing in the large technology companies. I think people slowly are losing faith in (a), the accounting. So, let’s just talk accounting for a second before people switch off.

If you’ve got one business that owns another business, and they’re buying stuff from that other business, well, it’s going to be revenue in that business and costs in this business. When you consolidate and you put it together, they kind of net each other off.

But if you’ve got a business doing transactions with another business and they only have 15% or 20%, in the case of Microsoft Corp (NASDAQ:MSFT) and OpenAI, and OpenAI is using Microsoft servers, that is revenue for Microsoft, but it’s OpenAI losses. Those losses are not being recorded in Microsoft’s accounts because Microsoft doesn’t own a big chunk of that business. So, you’ve got a bit of a circular reference going on here where NVIDIA Corp (NASDAQ:NVDA)’s lending money to people to buy Nvidia chips and all that sort of stuff. That’s the first thing.

The second thing is that you’ve got some off-balance sheet finance, which is now taking place in the likes of Meta Platforms Inc Class A (NASDAQ:META) and that kind of thing. A lot of these companies have used their cash balances to buy back shares.

Now, they’ve bought back shares, but the share count hasn’t fallen much. That’s because what happens is they give their employees share options. The share goes up, the employees exercise those options, there’s now more shares in issue, and the company has to use that money that they’ve got on the balance sheet or whatever to buy those shares back in the market, offsetting it.

Now, if I pay you a salary, you’re working for me and if I pay you a salary, that’s cash outflow, OK. And that’ll come through in your free cash flow numbers. But if I give you shares, and then you exercise those shares in the stock market, and then I buy and I use the money to buy back those shares, it’s effectively like paying you a salary. I’m just paying it to you in a roundabout way. That payment does not come through in the free cash flow calculations.

So, if you adjust for these things, we think these large tech businesses are trading at 50 times free cash flow. In fact, 1.3% free cash flow yield. Who’s putting the money in the bank and getting 1.3%? No one wants to do that right now. So, I think there’s a real worry about that.

The other thing is, if you think about these large tech companies, they each had their own little area. Amazon.com Inc (NASDAQ:AMZN)’s in online shopping, Microsoft’s an enterprise, Google (Alphabet Inc Class A (NASDAQ:GOOGL))’s in search. They are all in AI. So, the competition is fierce, and there’s going to be one winner, and we all better just spend. So, they are all in artificial intelligence (AI), they’ve spent a lot of the cash buying back shares, valuations are heady, and the rest of the world is looking at America and going, what is going on over there?

We had martial law in South Korea late last year, and police were on the streets. Well, police are on the streets in America. The difference was that, in Korea, the stocks were on five times earnings. And now in Korea, they are not. They are on 50 times cash flow. So, I think you’ve got a lot of issues.

You’ve got an international investor base now questioning what’s going on in America. You’ve got a deeply divided society like never before. You’ve got the economic data that’s been coming out on things like delinquencies, auto loan arrears, credit card arrears, auto loan delinquencies, housing data. It’s not been good.

And you’ve got a market that’s priced to perfection. We know that the UK is struggling economically, but the market’s not priced for perfection. The other problem is everybody’s in there. The whole world is invested in Mag 7. Look at most factsheets, it’s like Microsoft, Amazon, etc. So, you’ve got this priced for perfection, and most people are there, and yet there’s stuff that’s not going well. I worry about that.

• Shares for the future: making America clean again
• Watch our Ranmore Global Equity video: Bargain shares on offer in the UK and beyond

Dave Baxter: You have a very low allocation to the US, which might attract some people to the fund. What would it take to draw you back in?

Sean Peche: Well, a cracking start would be the CEOs stopping dishing out share options themselves like water.

No, valuations. So, there’d need to be a massive correction. And who knows? There’s not been a lot of fear in the market. I think we’ve been going 17 years, and I think in that time the S&P is up double digits 10 or 11 times. It’s only been down double digits one year since we started - we only started in the latter part of 2008 - and that one year was 2022, so there hasn’t been a lot of fear.

Then, in 2023, in the first quarter of 2023, you had AI saving the day. So, imagine you’re an adviser and you go around to your client and you say, look, it was a challenging year last year, but don’t worry, AI has saved the day. There’s been no fear.

I think there should be, and it’s only when you get fear that you start to see realistic prices, I would guess. So, that’s what’s keeping me up. But thankfully we’re very underweight the US. I think what could be interesting is that when international investors, and certainly a lot of international investors we speak to in the UK, in Switzerland, in South Africa, are all looking to try and reduce their exposure to the US. So, if there’s a problem and they sell US equities, and the dust then settles, they are not redeploying that money back in the US. It’s going elsewhere.

Remember, you’re going from a very liquid market to a less liquid market. Let’s say you are a massive sovereign wealth fund and you have a $100 million in JP Morgan. Now, JP Morgan trades over a $1 billion a day. In fact, it’s closer to about $2 billion a day. So, if you’ve got a $100 million, that’s like 5% of one daily trade. You’ve [could’ve] sold a $100 million while we’re sitting here chatting.

If you try and deploy that $100 million in European banks or Asian banks, it’s far less liquid. They trade like a $100 million a day. So, you will be sitting on the bid for a while.

Now, put that across all the sovereign wealth funds, hedge funds, pension funds, etc. It means that those other asset prices could rise. Everyone thinks if the US falls, we’re all going to fall. I think there could be a scenario where the US falls and actually other stuff goes up because people are redeploying it in less liquid shares.

Dave Baxter: We’ve had some really big gains from all sorts of different markets this year. In that context, where are you actually finding value still?

Sean Peche: Yeah, I think that’s a very good point. I heard the other day that there are 30 markets around the world that are ahead of the S&P 500 this year. So, it’s almost masking the underperformance.

We’re still finding opportunities in Asia, to be honest. There are still many investors who consider Hong Kong or China or whatever to be uninvestable. We are still finding opportunities in domestic Japan. The yen has been weak recently, and so that drives the exporters, and you’ve had companies like their semiconductor guys and SoftBank. Look at SoftBank’s share price. So, that’s what’s been driving it recently.

But the domestic companies, which tend to not do well when the yen is weakening, because everybody rushes off and buys the Toyota Motor Corp ADR (NYSE:TM)s or the Shin-Etsus or whatever of the world. So, yes we’re still finding opportunities there.

Dave Baxter: Is Korea still offering value? You’ve spoken about the strong returns from that market.

Sean Peche: Yes, we’ve taken some profits in some of them. So, the Korean banks we’ve taken profits in.

But some of the conglomerates are quite interesting. Conglomerates have been very out of favour, but you’ve got a company like Hyundai Mobis. I mean, it’s a tricky market to invest in. You’ve got to open a Korean account. I don’t think you can invest in it. Well, certainly for us, we had to open a separate account with a sub custodian and all the rest.

But this company has a big stake in Hyundai, which is doing well as Korean automakers. You look at Kia and Hyundai, they are doing well, and they’ve had to compete with the Chinese markets, so they’re pretty hot on it. They've got a stake in Hyundai, a whole lot of cash, and then an auto parts business.

So, conglomerates are quite interesting there, we think. And if you’ve got limited downside, but you’ve got the upside from some of this unlocking of value, which they’re doing in Korea, it could be good.

• Ian Cowie: the niche trust winning big this year
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Dave Baxter: And bar valuations, what interesting trends are at play in the fund?

Sean Peche: We don’t really think in themes, but typically I guess you can get a few shares that cluster. So, we like to be drawn to out-of-favour stocks, and often stocks out of favour in the same place. For example, alcohol beverage companies have been very out of favour. You’ve seen Diageo (LSE:DGE) halve, you’ve seen the brewery stocks be under pressure.

Now, there’s good reason for some of those. You and I could have launched a liquor brand, a tequila brand, a gin brand. I mean, think about how many gin brands have been launched. You need an Instagram account, you need a bottle and a contract manufacturer, and typically you’re in the game initially. But now it’s harder, distribution is the key thing there.

So, yes, the youth are drinking less, but they’re drinking 0% beers. Look at the success of Guinness Zero. So, a recent position is actually Diageo. If you think about it, and what’s interesting, is China’s been quite weak, but India is growing strongly.

What’s also happening out there is, especially in places like Canada, is they are taking American brands off the shelves. So, maybe there’s a little bit of that going on where they’re taking, I don’t know, Jack Daniels off the shelf and putting Johnny Walker [there], for example.

So, it comes back to, I like Howard Marks’ second-level thinking. So, the first level thinking is the youth are drinking less. Second-level thinking is, yes, well, but they are drinking 0% beers and 0% beers have higher margins because you don’t have to pay the tax on them. So, that’s the first thing.

The second thing is Guinness is quite a unique brand in that it’s not a 0% Peroni competing with a 0% San Miguel, competing with a 0% Birra Moretti or whatever. There’s only one Guinness. And so Guinness’ growth is helping to offset some of the declines in the rest of the portfolio. Plus, you’ve got India growing sharply.

And at some point China’s going to flatline. I’ve got a 4% dividend yield, a 4.5% dividend yield, and I’ve got the new CEO who’s coming in and used to operating in a very low margin market: Tesco, where every day you’re waking up and fighting Aldi and Lidl. So, you’re used to being very lean on the costs, and you’ve probably had good times in those liquor businesses for a long time with fat margins. So, maybe there’s lots of costs to cut, you know.

So, if you look at our portfolio, we’ve got a few of those. We’ve got Molson Coors Beverage Co Class A (NYSE:TAP.A), which is a brewery business in the States. Now, they all have their challenges with the aluminium, and the tariff prices and all of that. We’ve got Carlsberg. You know we’ve got Diageo. So, I guess, liquor’s maybe one theme, which has been deeply out of favour. But we’re trying to be selective there.

Another theme is travel. So, we’ve got easyJet (LSE:EZJ), we’ve got some Jet2 Ordinary Shares (LSE:JET2), and the level one thinking, or first-level thinking, is that travel is discretionary. Well, I don’t know, maybe not, maybe less so. I was speaking to somebody the other day, and they were catching a train to Leeds or something. You could’ve bought four return easy Jet tickets to Greece for the price of a train trip to Leeds.

In fact, you’ve just seen there’s another airline called Blue Islands, which has now gone into bankruptcy. So, I think it’s very difficult to start a low-cost airline or an airline business. Those guys, easyJet, Ryanair and Jet2 - we’ve got a little bit of Ryanair as well - they run a tight ship.

I think those businesses are better businesses than they used to be. In the old days, they’d say, well, airlines are terrible businesses. But Michael O’Leary’s shown us that they don’t have to be bad businesses. If you buy your aircraft at the right time, which he’s done, and if you use technology to tweak the prices, such that you fly these planes full and you squeeze every last pound out of the consumer when they do fly, they can be good businesses.

That’s why I say, well, we’re not going to buy these stocks and hold them forever, because you don’t know. Things change. What were once great businesses are now maybe not such good businesses. I’m thinking of consumer brands in that regard. What were once tricky businesses are now better businesses because of technology. So, I think a few travel names is probably another theme.

• The big trends shaking up investment trusts
• Three high-risk areas return to form in 2025: will it last?

Dave Baxter: What’s the biggest risk for the fund in 2026?

Sean Peche: Well, the biggest risk is this AI frenzy keeps going on for longer than expected. I guess that.

But we tell our clients, don’t worry about the performance. I know people are attracted by performance, but what’s more important is that you think that how we invest and our decision-making process makes sense. 

So, if there is lots of excitement and we don’t get swept up in the excitement, that’s fine. You should be happy that we don’t get swept up in the excitement.

So, I think that’s probably the biggest risk I would imagine. Because we’re nicely diversified. But if America stays in favour, I’d be surprised, but let’s see. I’ve been surprised before.

Dave Baxter: What’s your biggest reason to be cheerful, and to be fearful next year?

Sean Peche: OK, cheerful because I think active management’s going to see a return. This is my view, but I think everybody has rushed into passives, [thinking] let’s save on the active management fees. We only pay whatever it is, seven basis points to go and buy a S&P 500 passive. I came across a great saying the other day, which was ‘I think people need to worry about the high cost of low-cost investing.’ Which I thought was really good - it’s not mine.

Because if you think, I’m going to go and buy an S&P 500 tracker and it only cost me seven bips, but in that you are exposed to these things halving, which they could easily do. What’s the point in saving some active management fee, but then exposing your portfolio to 50% drawdown? So, that’s my point.

The real cost of some of this passive investing has not been paid yet. It’s still coming, I think. So, the reason to be cheerful is that active management could see a resurgence.

The reason to be fearful is that everybody’s on one side of the seesaw, and if you just get a little bit of a shift, it could be problematic. Look, we’ve seen this with bitcoin. Bitcoin’s been under pressure, and this is while you’ve got a guy in charge of the US who’s all for bitcoin, and I just worry that this is a sign of things to come for the individual investor.

So, we’re in challenging times here. There’s a lot of very smart investors who are calling caution, so let’s be cautious about it. And you’ve got the rest of the world, these unloved companies that have been ignored in places like Hong Kong and Japan. Go find those.

Dave Baxter: Sean, many thanks.

Sean Peche: Thank you, Dave.

Dave Baxter: Thank you for watching. Please do let us know what you think in the comments. And if you’re enjoying this series, do hit the like button and the subscribe button. Take care.