At Exchange, Evan Harp sat down with a CIO.
John, thanks a lot for joining me, Evan. Exchange is something we should discuss. The most important ETFs conference of the year is happening in Florida. So far, what are your highlights?
The conference had more interest in active management than I've seen before. Capital Group is one of the companies I see at the conference. Some of the big active management firms that got into theETF space have had great success. I don't see anyone from either the speculative or disruptive growth space. That is fascinating.
The industry of exchange traded funds has matured. There are a lot of new faces. There are three things you need to do to stand out. Performance is important. There needs to be a research and content presence. Digital marketing and distribution are also included. You need to nail these three things if you want to be successful in the space.
Evan Harp wants to know why you think this will be a big year for active management.
At an interesting point in the cycle, we are. For the last decade, passive worked well. What's the reason? You had low interest rates and deflation. There was a lot of money going into low cost, buy and hold strategies. trillions were poured into S&P 500 index strategies. We are in a bear market. You don't have the S&P trading at 18 times earnings in a bear market. I am concerned that there is more downside for the S&P.
If you remove the S&P from the equation, the rest of the U.S. market is much more attractive. Managers can help investors navigate. If you want better investment outcomes in the next three to five years, you will want an active manager, as our firm believes we will be living in a higher interest rate, higher inflation, and more volatile world. The price of the S&P is still high.
Two years ago, our firm decided that inflation was high. We had our best year ever in 2022. Past performances are not indicative of future results. We think the next few years will be a good time to be active, and that's why I think you see these large asset management firms entering. If you look at year-to-date flows, you will see that active funds are taking in more assets than passive funds. This is new and noteworthy.
It makes a lot of sense. The rest of the world is looking pretty good, as is the U.S. stock market. Is it possible to give a mile-high view on China, emerging markets, and even frontier markets?
The question is good. With a strong U.S. dollar, emerging markets struggled, and China was in a state of lock down. Emerging markets need China to work. Since the U.S. dollar has been weak, there has been a bit of a boost for emerging market stocks. Portfolios can be helped from an inflation hedging standpoint by parts of EM that are commodity and inflation sensitive.
The AXS Astoria Inflation Sensitive Exchange Traded Fund is one of the things we manage.
Brazil, China, and many other countries are natural resource heavy. More people are interested in commodities than a decade ago. As inflation has gone up, commodities and emerging markets need a catalyst. We believe that we can be entering into a new cycle of investing outside of the U.S. I think you would like to own some emerging markets in your portfolio. A new cycle is under way as the U.S. has had a great run over the last decade.
For the broad emerging markets like Brazil, China, India, you want to be careful about what you eat.
What is one thing that investors are not paying attention to right now?
The yield curve is getting more negative. There are a lot of indicators that are not showing a trough. The market is up in the first five, six weeks of the year, and I think people forget about the weak earnings environment. Huge amounts of workers are being laid off. The Fed wants to hike rates further as earnings are getting worse. There are consequences for that. The market is pricing in a soft landing and we think there is a hard landing.
Last year we talked about this with investors and the market as a whole, but investors have a short-term horizon. In a period of six to eight weeks, the market rallied and suddenly investors forgot the basics. The rally has been going on for more than a month and a half. I think there will be more rough times for investors, which is why we are arguing to be global, to be diversified across factors, own alternatives, and get back into U.S. bonds.
There is a lot of speculative behavior and it is almost like the bubble has been re-inflated. Many disruptive growth stocks are up around that much as well. I don't think that market segment is a good one. Some investors aren't acknowledging the challenging macro and earnings environment
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