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This five-star fund manager is betting on cut-rate AI and beer - and China, too

By Barbara Kollmeyer

Critical information for the U.S. trading day

We've got big tech earnings on the way from Microsoft and Alphabet, as a Fed meeting also looms.

What are big money managers worried about? "The problem is we're priced for a soft landing," Matthew McLennan, co-head of the global value team at First Eagle Investments, told WealthTrack in a recent interview. "But there's been no landing."

McLennan, who oversees around $90 billion in assets, says with high U.S. employment, it may be tough for the Fed to ease much without triggering more inflation. He also frets the market is ignoring a poor U.S. fiscal situation, with government debt rolling into higher rates.

Those concerns can be tempered with diversified and balanced investments, says McLennan, also co-portfolio manager of the five-star First Eagle Global Fund SGENX, which he's managed since 2008. Bottom-up stock pickers, McLennan and company seek businesses with an "incumbency advantage in industry niches that are available at the right price."

He says the portfolio is split 50/50 between U.S. and international names, and some gold.

"Around 70% to 75% of our portfolio is in businesses that we want to own for the next decade, but we have about 15% of the portfolio in gold and gold miners as a potential hedge," McLennan said, noting that slightly more gold exposure lately addresses U.S. fiscal worries, as those assets will perform well "if expectations become more modest going forward."

As for stock picks, the manager begins with the hot artificial intelligence sector, where he sees a range of companies benefiting. Two of his biggest holdings have been Meta Platforms (META) and Oracle (ORCL), where he says valuations are "quite reasonable" relative to potential growth.

But he also likes companies using AI in their business processes, such as Japan's Fanuc (JP:6954), an industrial automation giant that has "long been invested in studying AI," and using it for predictive maintenance of its robots.

McLennan says investors "don't have to buy a concept stock at 40 times earnings or 50 times earnings to be a beneficiary of AI in the economy."

Fanuc trades at 28 times current earnings, versus 35 for Meta and 82 for Nvidia (NVDA).

His next pick is the São Paulo-headquartered brewer AmBev (ABEV), which is just over half-owned by Anheuser-Busch InBev (BUD), with a growing business, no debt, net cash and a 6% dividend yield. AmBev, he says, is just one of many staples with "century-long brands that trade at a discount to the market," he says.

"And so if you're willing to buy something that's seen as a little more stodgy in this environment, then I think something like an AmBev, because of its emerging-market taint ... is reasonably valued," he says.

Its brands include Brahma; Antarctica; and Quilmes, the top Argentine beer, in which it holds about a nine-tenths interest.

McLennan also invests in China's unloved market via Dutch-listed holding company Prosus (NL:PRX), which holds a 27% stake in Tencent (HK:700), a leading online Chinese business with top gaming, social-media and ad platforms.

Tencent trades at less than 10 times earnings before interest, taxes, depreciation and amortization, with a strong balance sheet, and is buying back stock, he notes. Prosus trades at a discount to the value of its Tencent Holdings and has another 25% chunk in leading online businesses in Eastern Europe, Brazil and India.

He lastly flags Exxon Mobil (XOM) as "an essential infrastructure company" that's been in the portfolio for a number of years as an investment for long-term investors looking to diversify.

Exxon holds some of the "greatest energy basins in the world that have the longest duration and are the most cost-effective," while its upstream business is oil and natural gas, which has "a far lower hydrocarbon intensity," he says.

And the above companies can ride out tougher environments, says McLennan. "I think if you own good businesses that sell relevant products at rational prices, it's a good place to be long term," he says.

Read: There is no such thing as price-to-innovation. Explaining the viral clip and the valuation measure that Peter Lynch made famous.

The markets

Stocks are struggling at the start, with bond yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y dipping as a two-day Fed meeting is set to get under way. Gold (GC00) is 1% higher at $2,065.10 an ounce. The Hang Seng HK:HSI dropped 2.3%.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              4,927.93   1.30%  3.90%   3.31%   20.88% 
   Nasdaq Composite                                                     15,628.04  1.31%  5.84%   4.11%   34.90% 
   10 year Treasury                                                     4.05       -8.78  11.40   16.91   53.85 
   Gold                                                                 2,037.40   0.71%  -1.66%  -1.66%  5.97% 
   Oil                                                                  76.75      2.79%  7.60%   7.60%   -1.36% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

UPS (UPS) is sinking on a revenue fall and downbeat outlook. And General Motors (GM) and Pfizer (PFE) are climbing on strong results. After hours, Alphabet (GOOGL) (preview), Microsoft (MSFT) (preview) and AMD (AMD) (preview), alongside Starbucks (SBUX) and Electronics Arts (EA), will all report quarterly results.

Berkshire Hathaway-held BYD's (CN:002594) earnings guidance disappointed, and the Tesla (TSLA) rival's shares fell 4%.

The S&P Case-Shiller U.S. home-price index showed prices hit a new high in November. Job openings and consumer confidence are due at 10 a.m. Data showed Europe's economic stagnation continued. The IMF lifted its global economic growth outlook, saying a hard landing is unlikely with growth improving and inflation ebbing.

Elon Musk says his neurotechnology company Neuralink carried out its first brain implant in a human patient, describing the result as "promising."

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   AMD     Advanced Micro Devices 
   MSFT    Microsoft 
   AMC     AMC Entertainment 
   NIO     NIO 
   AAPL    Apple 
   GME     GameStop 
   SOFI    SoFi Technologies 

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-Barbara Kollmeyer

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