CIO Roundtable: Eyeing a World

Victor Zhang, CIO, Senior Vice President

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A year ago, I had a very different outlook on what was most likely to happen in our economy. There has been so much doubt about the prospects for economic growth, inflation, interest rates and employment.

And yet 12 months later, every market around the world has been celebrating the progress global economies have made. We're sitting here 12 months later with lower interest rates, not just in the U.S. but virtually in every other developed economy.

There are geopolitical risks and there are company-specific risks that we have to manage and be on top of. But I don’t think this environment presents more risk than we were sitting with a year ago.

Charles Tan, co-CIO, Global Fixed Income

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We think the likely outcome is somewhere between a soft landing and a mild recession. That means growth should subside to maybe just above zero, but it does not collapse. It's more like a bumpy landing.

There are still a lot of downside risks to the economy. And we don't think we are in the clear yet.

Charles Tan

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The Fed, at least in my mind, is inherently dovish. It was OK for the Fed to lean dovish in the world prior to COVID, when you had structurally lower inflation. But now you have higher inflation and structurally it might be problematic and risky.

We also need to keep in mind that this cycle has been very different from prior cycles. In fact, all of the traditional forecast models have broken down. I think the big reason really is because of the unprecedented level of a fiscal stimulus.

Kevin Toney, CFA, CIO, Global Value Equity

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Consumer spending has been declining moderately over the last few years as the personal savings rate has been normalizing back to pre-pandemic levels. … But you really have to dig in and peel back the layers to understand it.

Low-income consumers have almost been behaving like there’s recession. They have less cushion and less discretionary income, and so inflation really hits them hard. And SNAP (Supplemental Nutrition Assistance Program) benefits have been rolling off over the last year. And that pulls away from some of their spending. We see middle- and high-income consumers spending—but they're worried.

Overall, credit looks pretty good for the consumer. But if you look deeper, lower-income credit is deteriorating quite significantly.

I’d say the jury is still out on whether we’re going to see a typical recession pattern that starts with weakness in lower-income consumers and then it moves up to the middle- and high-income consumers and eventually moves into industries being harmed by high inflation or high interest rates.

Kevin Toney

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Growth versus value and large versus small cap—we're seeing multidecade valuation dispersions.

Patricia Ribeiro, co-CIO, Global Growth Equity

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Earnings growth has turned positive across the globe and is starting to accelerate again. Earnings revisions are actually coming through, which is really encouraging at this point. And valuations are very attractive relatively speaking.

Patricia Ribeiro

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We see artificial intelligence as a very long secular story. We’re just at the very beginning of it. What we've been seeing is more of the hardware side of the growth, and there is a lot that we don't even know yet.

A few companies have benefited early on, but that is starting to extend and spread. For example, if I look at the emerging markets world, Taiwan is a big beneficiary of this supply chain, and we are seeing that coming through. It's not only large cap—it’s going into even smaller-cap names.

We're also seeing countries like Malaysia trying to attract investments in data centers. Why? Because they have an excess of energy. Enough energy to supply data centers.

Charles Tan

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Fixed income as an asset class has become much more attractive. You can find high-quality yields, between 5% and 6% without taking on much duration risk. The traditional role for fixed income, in terms of a downside protection and a risk diversification, has been largely restored.

Richard Weiss, CIO, Multi-Asset Strategies

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Our multi-asset strategy team did a deep dive into the election and examined the policy platforms of both parties. We evaluated all aspects of the policy platforms available on both sides, and we did it in terms of risks.

In short, both parties have inflationary programs going on. There's no question interest rates and inflation would go higher if they were to enact their policies in full force. It would hurt the deficit, of course, and the debt burden, and both parties would hurt growth at the margin.

You have to look at this as the low-income subsidies and social programs on the one hand versus the tariffs on the other—they're both detrimental to inflation. We see the Republican platform a little more inflationary, but the Democratic platform a little more harmful to equities.

Charles Tan

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Both parties share of love of spending—especially spending money they don't have—which means they have to borrow. Republican policy is a bit more about tax cuts, while the Democrats are more focused on social spending—but the end result is probably similar.

From our perspective, we're prepared for higher spending and a higher deficit and more bond issuance, which will put pressure on inflation and higher rates. So that fits into our overall theme of that inflation will be down over the next 12 to 18 months, maybe one to two years, but beyond that there are secular forces driving up rates and inflation.

Richard Weiss

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I would go so far as to say index investing is about as risky as it's ever been in history. An index fund is not going to have any risk control.