Schroders investment boss Martin Conlon sees danger in BHP, index-focused funds chasing latest technology boom

Veteran fund manager Martin Conlon says history was against BHP shareholders being better off in the $75 billion takeover of Anglo American. Not only was Mr Conlon sceptical about the Australian mining giant staking so much on a pursuit of copper assets supposedly essential to the looming AI revolution. BHP pulled out of talks to buy Anglo American less than a week ago. The Schroders share manager also knows that takeovers more often than not leave the buyer worse off. “Mergers and acquisitions are generally a bad idea,” the Schroders head of Australia equities said. “And the bigger they are, the worse they are.” The Sydney-based manager gave the warning after he and his colleagues gave Perth financial advisers their view on the risks and opportunities as share markets trade at record levels, led by US technology giants. The market capitalisation of AI-focused chip maker NVIDIA had more than quadrupled over the past two year to $4 trillion, giving its value approaching modern technology pioneers Apple and Microsoft. Alongside electric car maker Tesla, internet shopping giant Amazon, Google owner Alphabet and Facebook proprietor Meta Platforms, these stocks are known as the Magnificent Seven. But Mr Conlon said this flood of global savings into a small number of stocks was creating massive distortions in index-based share funds. Someone buying a global equity portfolio would likely have more value in the Magnificent Seven than in the listed shares from France, Japan, China and the UK put together. “The law of large numbers just tells you that it is very difficult for companies to drive earnings up to justify valuations when market caps get that big,” he said. “You just need to annex small countries every year to get that sort or profit growth — that’s just not realistic. “They’re not only scary numbers in terms of growth and profitability, but how much people are extrapolating that profitability staying and growing over time.” NVIDIA is being driven higher by its dominant position in supplying chips to AI industry players and speculation about it being at the forefront of a fourth industrial revolution. The widespread talk about this looming revolution is also boosting copper prices amid speculation the conductive metal’s will keep rising as data centres and electric cars enjoy bumper growth. Consultancy group McKinsey last year tipped copper demand to rise from 25 million tonnes in 2023 to almost 37mt in 2031. But the influential consultancy sees global copper production barely scraping above 30mt in 2031 based probable and certain projects, mine restarts and known recycling sources. Mr Conlon agreed it was unclear if the world could produce anywhere near the copper needed to meet the growing demand. Rather than just flocking to stocks and commodities that already had very bright futures priced into them, the Schroders investment boss said investors should be “tangential in your thinking” He pointed to highly-conductive aluminium with its potential use in high voltage cables and its relatively flat price over two decades amid concerns about China’s massive production capacity. Mr Conlon said western world aluminium producers could be advantaged in the push for western world capacity and the push for reduced globalisation in vital supply chains. “With the aluminium assets of Alumina and South32, most of the time you are buying those assets at less than their replacement cost,” he said. “That is very good place to be.”