CIO Roundtable: Changing of the Guard

Following an extended period of concentrated—perhaps overconcentrated—market returns, investment opportunities appear to be broadening out. Client Portfolio Manager Jim Shore sat down with our chief investment officers (CIOs) for a conversation on a range of topics top of mind for investors.

Hear our investment professionals’ views on earnings growth potential in non-U.S. markets, bolstering portfolios with higher-yielding stocks, slowing U.S. economic growth and the possibility of three to four rate cuts this year.

Key Takeaways

Edited excerpts from our conversation.

Tail Risks

I see the market is possibly mispricing two tail risks. The first one is a tail risk on the upside—underestimating Elon Musk’s work at DOGE (Department of Government Efficiency). Its target is to identify $1 trillion in savings. If DOGE is only half successful, it still will have a big impact in terms of the market’s expectations for inflation and the overall outlook.

On the flip side, the market may be overpricing U.S. economic growth. Again, if DOGE is only half successful, that means tens of billions of dollars, or even hundreds of billions of dollars, in cuts to government spending—a shrinking government. And over the past four to five years, government spending has been the single biggest support to the U.S. economy. So if President Trump is successful in cutting spending, that means there will be economic pains, at least for the short term.

Over the past couple of months, market fears have been dominated by deficits and the debt outlook. I think over the next couple of quarters that could be replaced by fears of economic slowdown, rising unemployment and even recession. That could lead to lower interest rates, wider credit spreads and pressure on the equity market.

Charles Tan, CIO, Global Fixed Income

Redeploying Assets

In our portfolios, we have focused on redeploying into arguably undervalued—but certainly underperforming—areas of the financial markets. Whether it's emerging markets, non-U.S. equities, bonds or small-cap and value-oriented stocks, we think these “ignored” asset classes look compelling from a diversification and risk/reward point of view. Both value versus growth and non-U.S. versus U.S. have already performed well this year, and I think that trend is likely to continue.

There's no question that what we're facing is almost the anti of 2024. So I would forget about momentum and work your portfolio in other ways. Nobody knows where the ball is going from here, with all of the policies out there. So, security selection, be it in value or non-U.S. equity or bond issue selection, is paramount this year.

Richard Weiss, CIO, Multi-Asset Strategies

Tariff Playbook

During the fourth-quarter earnings season, about half of the companies talked about the risks of tariffs and adjusted their guidance to be more conservative.

We take a long-term view on stocks and markets, so it's really about focusing on taking advantage of where we see opportunities. Right now, that means we're looking at more domestic-oriented companies as opposed to those exposed to cross-border trade and also to those benefiting from GDP growth and consumer spending. These trends are playing out differently in different countries.

When we look at China, the consumer is still weak, but we see pockets of opportunities. Travel is one. The consumer in China continues to travel domestically as well as internationally, and companies related to trip planning have benefited. Another area where we see opportunities is in the electric vehicle (EV) industry. Companies involved with EVs and batteries continue to benefit from incentives from the government.

Patricia Ribeiro, co-CIO, Global Growth Equity

Higher-Yielding Stocks

At these levels of valuation and index concentration, we believe equity returns could be muted over the next five or 10 years. We've also observed that higher-yielding stocks are trading at multidecade lows. Therefore, yield could end up being an important part of your return.

High growth is what's been rewarded, and these types of stocks have been left behind. But across various sectors, particularly consumer staples and health care, we see higher-yielding stocks that look attractive. We also see pockets in REITs that appear attractive. For example, senior housing looks pretty attractive to us. We like the supply and demand fundamentals. You have strong demand coming from the growth of seniors needing housing. Then, on the supply side, you’ve had weak construction starts and inventory is down.

Kevin Toney, CFA, CIO, Global Value Equity

Expansion of Artificial Intelligence's Effect

We see that capital expenditures (capex) by the Magnificent Seven is still growing, but their earnings expectations are not growing as fast as they were over the last couple of years. So investors are starting to look more broadly, including outside the U.S.

For instance, AI demands a lot of power. That means it needs more investment in electric utility generation, so it’s creating opportunities in areas that are not usually thought of for growth. We're seeing the demand there pick up and capex going up quite a bit as well.

There are more areas to look for growth versus what we have seen in the last couple of years, and that’s positive when you are looking from the bottom up and really helps diversify portfolios.

Patricia Ribeiro

Fixed Income Opportunities

In our portfolios, there are a number of quite appealing opportunities. One is with mortgage-backed securities (MBS), which is the second-largest and most liquid market after U.S. Treasuries. Not only is it solid income potential but also gives you the prospect of downside protection. It’s also a good, high-quality way to express a long-duration view because of the prepayment optionality contained in the MBS.

On the other side of the spectrum are commercial mortgage-backed securities, which have been sold off over the past few years. You can actually find high-quality, triple-B-rated seasoned pools with attractive yields.

One more example would be the additional tier-one capital issued by European banks. These hybrid opportunities between equity and straight-up bonds have been yielding around 6%. So I see no lack of good opportunities in the fixed-income market.

Charles Tan