By coinnews 
00:00 Speaker A
So I’m hearing from you that large cap tech may be back as the defensive play. But I know in your notes you also talked about Chinese tech being attractive to you. Which of the two, if you had to pick one, is more attractive?
00:18 Brian
Well, we are currently overweight China in our portfolios. I guess that’s despite the noise around the tariffs, we kind of ridden that through. A lot of the exposure we have is not particularly companies that are in competition directly with with the US and companies that have pretty diversified export bases. So it’s not just about what the tariffs between China and the US are. Although now that they’ve been lowered to 30%, this is less of a pressing concern. Valuations are going to, for the most part, look more attractive outside the US. We think that there are parts of the US that look quite extreme. And that’s why, look, talking going back to your previous question about the 60/40 portfolio turning into 40/60, that makes sense only when you look at very, very long-term valuations. Right now equity risk premiums in the US are very low. A lot of that is big tech kind of dragging up valuations. So if you’re looking short term, if you’re looking to be, you know, somewhat insulated from the trade war, somewhat insulated from the slowdown, this may be the right sector in the US. If you’re looking kind of beyond that, 5 years, 10 years, it’s hard to get excited about US stocks where they’re currently valued. And so we have been deploying more, both in Europe and in China, to try to get some diversification in terms of the valuation that we think is appropriate to invest at.
02:51 Speaker A
And Brian, my guest host Tim has a question for you.
02:57 Tim
Hey Brian, you know, one of the things you talk about here is really avoiding some of the junkier parts of the market, whether that be high yield bonds, or skeptical to the rally that we’ve seen in small caps thus far. What would change your mind and really to get more bullish on some of those pockets?
03:24 Brian
I think we need to see high yield spreads go wider. So I guess what I’m saying is, things need to get worse before I think we get really excited. There was that brief moment where, you know, right after the Liberation Day tariffs were announced, where high-yield spreads really gapped out. There was a lot of things that really weren’t working well during that period. That was one area, one area that we looked at, again speaking of bonds, was municipal bonds that looked attractive, again much more highly rated, tax-advantaged, those gapped out as well because of liquidity concerns, basic kind of market function concerns. Those have rallied back as well. To get excited about high-yield, we need to see spreads in the kind of the 500 to 600 basis point range at least. The last couple days we’ve seen them dip below 300. So we’re not excited yet except for investors that really need a lot of yield and don’t have a lot of tax sensitivity in their portfolios. I think this is in sympathy with the small cap kind of underperformance that we’ve seen as well. These two asset classes tend to perform similar to one another in a relative sense. A lot of the small cap index is simply not profitable. So one thing we tend to focus on is, again, really emphasis on profitability, low leverage, especially if it doesn’t look like we’re going to get an interest rate reset here, in at least the United States. It’s going to be a really tough environment for any companies that were counting on kind of that, that, that Fed cut environment, that soft landing or even a hard landing environment, where we had a chance to reset and kind of bounce back. It’s going to be tough for any investors that are sensitive to valuation and are sensitive to where we are in the cycle for these asset classes to, to lead.
06:08 Tim
Well, you know, speaking of interest rates Brian, you look at the US, you have the Fed that’s pretty much on hold. You have a favorable tilt toward Europe here. Can you talk a little bit about that? Is it anything beyond rates that gets you excited there?
06:32 Brian
Yeah, we, I mean, we still think the valuation is attractive in Europe. It’s obviously closed a bit with Europe outperforming so much this year. We’re not leaning quite as hard into the things that have absolutely been working, if you’re looking at like German cyclicals. We think that story may be, again, for now largely priced in. But there is definitely a difference in the environment here. Europe is not at war with the rest of the world in a trade sense, the way that the US is. So that’s an advantage for European companies. And as you alluded to, the European Central Bank has been much more aggressive. They’re not alone, it’s been really the other developed market central banks have been able to cut interest rates a lot more and again, create that reset that’s really positive for cyclical companies. That’s why it’s so hard to get excited about cyclicals in the US, when you look at the economic growth forecasts. I think we’ve probably seen the bottom in terms of the downward revisions. But if you’re growing at 1.3 or even 1.5, that’s below potential, and with the Fed not cutting because there’s concerns about inflation, that kind of puts us in a very tough spot, again, relative to the rest of the world. So we’re not saying that Europe is the long-term answer here for, for clients, but we do think it’s worth, if you, if you’ve been underweight international stocks, especially MSCI EAFE developed markets, including Europe, now is the time to look at at least getting back to that strategic weight.