Here’s another report from the Morningstar annual conference in Chicago by our correspondent, who attended the annual event.

Small cap stocks and emerging markets look like bright spots for investors at mid-year, according to Morningstar analysts. Some investors remain anxious however, but an asset management legend speaking at the Morningstar Investment Conference in Chicago urged them to stay calm and have faith in the markets.

Small cap performance has been noteworthy and underappreciated, said Dominic Pappalardo, Morningstar’s chief multi-asset strategist, who expects the sector’s momentum to continue. Investors should also consider international and emerging market stocks, but with caution, said Ricky Williamson, senior portfolio manager for Morningstar.

Artificial intelligence has driven up prices for a number of stocks in the sector, a prime example being Taiwanese semiconductor companies, Williamson said.

International stocks are also highly dispersed and concentrated, he added, and recommended that investors “be selective” and use active management. European consumer companies offered  investors a “cyclical opportunity” and South America, particularly Brazil, also presented attractive opportunities, Williamson said.

Hyperscale spending to reach $1 trillion
The analysts expected the artificial intelligence boom to continue, with hyperscale spending to reach $1 trillion in 2027. But the full macroeconomic effects won’t be felt until consumers of the AI products, not just the sellers, realize the technology’s productivity gains, according to Pappalardo. “We’re not there yet,” he said.

While overall market returns have been impressive for the first half of the year, they have “masked significant dispersion underneath,” with a few stocks at the top doing well while many others struggle, said Philip Straehl (main picture), chief investment officer, Americas, at Morningstar. “There has to be a broadening out of markets,” Straehl added.

That gap may even widen in the coming months as more massive initial public offerings come to market, the analysts said in their midyear outlook. “Their size and scale are having a much greater impact on the market than is typical,” Pappalardo said.

Inflation is the prime cause for concern going forward, the analyst warned. And an exuberant market may be too self-satisfied, according to Williamson, who wondered if there is “too much complacency among market participants.” 

Booth: uncertainty creates opportunity
The investment conference’s final keynote was fittingly delivered by David Booth (pictured below), the founder and executive chairman at Dimensional Fund Advisors, one of the most popular asset managers used by financial advisors.

David Booth

DFA, which has approximately $1 trillion in assets, is celebrating its 45th anniversary and Booth is about to publish his first book â€“ Stay Calm: Learn to Embrace Uncertainty in Investing and Life. Booth urged investors to have faith in the markets, acknowledging that investing is “uncertain and complex, but so is life.”

It’s uncertainty that creates opportunity, Booth noted. While investors can’t eliminate all uncertainty, he said, they can learn to manage it. Markets are unpredictable, he added, but investors can control the amount of risk they take.

Booth, who is estimated to be worth over $2 billion, dodged a question about speculation that DFA is for sale, saying he “comes to work every day.” He also continues to proselytize about investing, maintaining that anxious investors would have less anxiety “if they understood how markets worked. The pluses always outweigh the cost of the losses.” 

(To see previous reports from the conference by FWR, see here, here and here.)