00:00 Speaker A
You have three fundamental market drivers that are guiding your approach to equity allocations. Walk us through those.
00:07 Alessio de Longis
Certainly, the biggest theme next to the equities selloff, that is making investors obviously concerned and arguing for a more defensive posture, the biggest theme that is emerging now is also the rotation from U.S. equities into international developed markets, especially from the perspective of a U.S. home-based investor. The U.S. exceptionalism story has dominated global equity markets for 15 years, and we’re beginning to see some of the cyclical catalyst, but also longer term structural catalysts for a more balanced rotation for that global equity exposure, also into international equities. What are those three drivers that we like to watch? Relative earnings momentum. Relative earnings revisions are already arguing for momentum in the U.S. declining as a result of the Big Tech selloff, and revisions in Europe improving as a result of the improved fiscal stimulus. Second, we need to see definitely a better tone in terms of global risk appetite. Global growth expectations are decelerating. This is not a good environment in and of itself to already rotate into international equities that are more exposed to global trade. And the third piece is the dollar. To me, this is the biggest potential long-term trend that is unfolding before our eyes. Both cyclical and structural developments are beginning to plant the seeds for a long-term dollar depreciation cycle, and with that the benefits of diversification into international equities to benefit from that trend.
03:08 Speaker A
Okay, so what type of portfolio allocation should an investor be thinking of right now with all of those key drivers that you mentioned in mind?
03:19 Alessio de Longis
Well, the first step is always the most important decision is equities relative to bonds. And compared to a standard, let’s say, 60/40 allocation that most investors like to be allocated to, uh, this is a time to be slightly overweight fixed income relative to equities. We think this derating of valuations still has some way to go. Now, importantly, within that equity portfolio though, you can still maintain defensive exposures through low volatility sectors, defensive sectors. And as I mentioned, make sure that today compared to the last few years, you’re way more diversified into international equities, not just U.S. equities. And on the fixed income side, careful with the potential widening in credit spreads and spread risks. So we would prefer to be invested in high quality investment grade fixed income.
04:42 Speaker A
You know, you mentioned the earnings season. What are you thinking that the common denominator, the theme, of this earning season might be?
04:54 Alessio de Longis
The continuous adjustment to two themes, obviously the estimate, the guesstimate of the impact of trade tariffs across the board, across all sectors. So guidance volatility in guidance, uh, is probably going to be a big theme, and the continuous the ongoing derating of, uh, the AI valuations or guidance around AI. Why? It seems like a long time ago, but what happened in late January with the Deepseek announcement is a big important development that in and of itself may challenge the assumption of nearly monopolistic conditions of U.S. Big Tech with respect to AI R&D.
06:18 Speaker A
And so with that in mind, one thing that companies are also all talking about, that kind of plays into the uncertainty that you were talking about a moment ago, is just what the outlook for tariffs looks like and where their industries are or are not impacted. And of course, the kind of moving of the goal line on what seems like a good negotiation or dealmaking. I mean, all of that’s kind of up in the air right now. So how does an investor kind of safeguard their own portfolio against some of those risks?
07:04 Alessio de Longis
I think you’re hitting the nail in the head. There is no rhyme or reason in in the modus operandi that we are getting used to, right? So trying to use fundamental analysis, uh, which we would have otherwise done, right, to try to gauge the likelihood of tariffs or the impact of tariffs, doesn’t necessarily pay out in in this environment. So I would say acknowledging that the range of outcomes is much wider, so your confidence in the current outlook should be, um, discounted. Uh, the one common theme though is dollar depreciation. In my mind, regardless of which tariffs and on which sectors and how these negotiations go, one of the outcomes that is consistent with the desire of the new administration to lower trade deficits is an environment of weaker dollar, stronger, uh, weaker dollar and stronger foreign currencies.
08:42 Speaker A
Alessio, great to see you here in person. Thanks so much for taking the time.
08:46 Alessio de Longis
Thank you for having me. Absolutely.