Mark LaMonica: Welcome to another edition of Market Minute. We have Vesna here today to walk us through everything that’s happening. Maybe we’ll just do a quick roundabout in markets. So let’s start with shares. What is happening.

Vesna Peroska: Yeah. So after a period of deleveraging in areas like career and some rotation markets have been pretty resilient. And the US in particular reached all time highs recently. And while the market didn’t move too much last week, it managed to maintain those levels.

Mark: And then let’s turn to fixed income. What’s happening I guess particularly in the US Treasury market.

Vesna: Yes. So while the Treasury market has been increasing or the yields there have been increasing, it’s been responding to some different factors than the equity market in particular, things like the risk of inflation coming through and government spending. So the market or the fixed income market is looking at a different set of risks to the equity market at this point in time.

Mark: AI we have to of course mention AI. So it seems like there are some different perceptions from investors, perhaps with with what’s going on there. Do you want to walk through those now?

Vesna: AI markets generally accept that there is going to be demand for AI, and what markets have started doing is looking past that headline level, expanded expenditure or demand and looking at where profits may accrue. And this is important because there’s been a period of transition from investment funded by cash flows and and balance sheets to other sources like issuing bonds or joint ventures while it’s moving to other sources of funding.

There’s concern or thoughts around whether or not the earnings will come through on some of these businesses, and whether or not the valuation look reasonable as a result.

Mark: And how can we tie this together? So we’ve got equity markets, as you said at record highs. We’ve got fairly high yields right now. How do these interact and how should an investor think about that.

Vesna: Really good question. Now rising yields and affect equities in in a couple of ways. And the first way is around valuations. So the the yield is used to discount the cash flows for equities. And the higher the yield the higher the discount. So it affects valuations. But we also need to think about it because within a portfolio usually have bonds in there.

And they’re used as a hedge traditionally. Now if bonds and equities might react to say inflation in the same way by falling their price is falling, then an inflation surprise might result in bonds not really balancing the risk in an investor’s portfolio or the risk from equities like they usually would.

Mark: And so this must be challenging as a team. These multi-asset portfolios that you are managing. How are you dealing with this environment.

Vesna: Well you need to look at the way you can build a portfolio quite robustly. And with portfolio robustness. What we consider, what we are really looking at there is how will our portfolios react to different factors. And you can decide which factors you want to look at. So you might consider falling a rising inflation rates, interest rates even things like tariffs and how that might filter through your portfolio.

So what you’re trying to do is look at how your whole portfolio might react, rather than looking at the different asset classes and considering those asset classes as wrappers that don’t, that react independently of each other is a little bit risky. So you really want to see how the different factors, like inflation might affect your entire portfolio, and then you want to make sure that you’re not too heavily reliant on a particular scenario playing out.

Mark: And then what are some actual moves? Or it sounds like you’re obviously looking under that wrapper level. What are what are some actual moves that are that you and the team are making right now?

Vesna: Yeah, there’s quite a few things you can do now. We naturally have a valuation bias in our process. So while it’s important to stay invested, and we acknowledge that the market more broadly has quite a lot of exposure to AI in IT or the equity market. So you might want to look at better valued areas of the market, like US healthcare, where you’ve got some valuation protection and you may perform better if there is some inflation surprise.

What you could also do is consider bonds where yields are rising and while they’re rising, and may not provide the same diversification as they have historically, you might still want to have a little bit of that because the return there is attractive. But you don’t want to be overly reliant on fixed income or bonds as you’re diversified. And that’s where you can add some other strategies, like alternatives or liquid alternatives, which might perform well if equity markets fall.

And another factor, or another thing to include could be to consider holding a little bit more cash than you normally would. And the reason for that is it provides you optionality. So we don’t see markets as being particularly expensive nor particularly cheap. There’s not a lot of brilliant opportunities out there, so holding a little bit in reserve is what lets you really be ready to take advantage of market volatility.

Mark: Well, it sounds like there’s a lot going on as always, but thank you very much for walking us through both what’s happening and then the implications for investors.

Vesna: Thank you.