With the volatility seen in global stock markets over the past few quarters, what are the main risks and opportunities you see for equity investors this year, and how should they position themselves based on their risk profile?
The question invites, first of all, a background reflection: We are facing a paradigm shift. Traditionally, the volatility has been understood, and thus has been studied, as a situational phenomenon. However, what we are seeing is that this is no longer a one-off circumstance limited to a few quarters, but rather a clearly structural element in the world of investment.
This structural character responds, to a large extent, to the growing geopolitical tension between large blocks: on the one hand, China and the BRICS countriesand on the other, United States and its allies. This rivalry is generating instabilities in key areas such as defense, trade agreements or supply chains. The volatility It has become part of our portfolios and our lives permanently, not as an isolated episode. And, furthermore, the current context could not be more complex.
In this environment we identify various risks that act as fuel for this structural volatility. The first of them are the ratings. The markets present demanding levels, whether we analyze the price/earnings ratio or use adjusted metrics such as the Shiller’s CAPE. The valuations of the main markets are at high levels, which is one of our biggest concerns when building portfolios. Despite applying control tools such as stop losses and closely monitoring these levels, the market continues to show clearly irrational behavior.
Another relevant risk, which at the same time generates opportunities, is the high level of money supply in circulation. The monetary aggregates M2 y M3 are at historically high levels. Added to this is an incipient rebound in inflation, which, although it seemed controlled, is once again showing upward pressure. The combination of abundant liquidity and inflationary pressure tends to further strain the valuations of financial assets.
We also follow very closely the economic cycle. Economic theory reminds us that financial markets tend to anticipate the real economy, and we are already observing signs of slowdown in the financial economy, compatible with a phase prior to a possible recession. Although the macroeconomic data are not yet particularly negative, we do perceive lower GDP growth and increasing difficulty for companies to surpass the results of previous years. Everything points to a soft landing scenariowhich makes the economic cycle another key focus of attention.
Added to this are the geopolitical tensions: the war between Russia and Ukraine, the conflict in the Middle East, the friction with Iran, the movements of the Trump administration, the situation in Venezuela, Greenland or the China Sea with Taiwan. Although these episodes usually have rather temporary impacts on the marketsadd noise, tension and uncertainty to the investment environment.
In EuropaFurthermore, we must consider the regulatory riskswhich generate inefficiencies and negatively affect the competitiveness of companies and markets. Lastly, the evolution of inflation, interest rates and high levels of debt They complete the risk map that we are monitoring very closely.
That said, as Chinese culture clearly states, every risk also contains an opportunity. And in this context, we observe several. In an environment of contained inflation but with upward pressure and high liquidity, assets that protect against inflation take on special relevance. We are seeing it in the raw materials, precious metals, industrial and agricultural, in rural real estate and in the real estate sector in general, whose values and incomes tend to adjust with inflation.
Likewise, in a scenario of possible rate cuts, especially in Europe and potentially in the United States, bonds, particularly US bondscan offer price relief in the face of falling yields.
Another segment with potential is small and medium-sized companies, both in Europe and the United States.which tend to especially benefit from an environment of lower rates and greater access to credit. We believe that the small and mid caps universe can offer interesting opportunities.
Also We identify value in assets with low debt and solid fundamentals, such as emerging fixed incomewhere debt levels are significantly lower than those of developed countries. Likewise, we see opportunities in private equityespecially in medium and small companies with recurring cash generation and healthy balance sheets.
Lastly, the alternative strategies are gaining increasing weight. The hedge fundsespecially global macro, market neutral or low beta strategies, can add value in an environment of high valuations and greater dispersion between assets. We believe that these strategies should gain weight in portfolios.
In short, It is not so much about being more or less invested depending on the risks, but rather about being better invested.
As central bank policies continue to impact fixed income and equity markets, how do you recommend balancing the allocation between stocks, bonds and alternatives within a diversified portfolio in the current environment?
Los central banksand especially the European Central Bank, are taking a clearly data-dependent approach, with a very close monitoring of inflation. It is worth remembering that not all central banks have the same mandate: while the ECB focuses exclusively on price control, the Federal Reserve combines that objective with stimulating economic growth.
The combination of pressure to lower rates, expansionary fiscal policies and an uncertain macro environment leads us to rethink asset allocation. On the one hand, we believe it is necessary to adjust the equity exposure. Currently, the earning yield of the S&P 500 is lower than the yield of the 10-year US bond, indicating that the expected return of equities is particularly low relative to their risk. In this context, it is reasonable to reduce exposure in the most overvalued markets.
In exchange, We think that fixed income can regain prominence. In the current situation, we prefer shorter durations, around 3 to 5 years. Emerging fixed income, due to its lower levels of debt, may gain weight in portfolios. As for the high yieldwe are selective: The spread is attractive and default rates remain low, allowing opportunities to be found in issuers with solid balance sheets.
Where we are being more active is in the alternative investment. Following the approach of large university endowments and family offices, we observe a growing weight of these strategies in well diversified portfolios. We highlight private equity, especially in infrastructure, with special interest in technological and energy infrastructure, as well as the real estate sector.
Which sectors or geographies do you think are best positioned to generate risk-adjusted returns in 2026, and why? Are there areas that investors should avoid or watch cautiously?
From the geographical point of viewit is worth remembering a well-known phrase by Warren Buffett: One of the great historical mistakes has been investing against the United States. Although their assessments are more demanding than in other regions, we continue betting on the United Statesmainly for its leadership in innovation. The technological advantage, investment in R&D, more flexible regulation and the boost to the national industry mean that it continues to be a core region in portfolios, although with a more selective approach.
Europe, for its part, offers much more attractive valuations. Although it is a mature and regulated marketits industrial strength remains relevant, especially in the context of the new boost to defense spending. It is foreseeable that capital flows will occur from expensive markets to others with more reasonable valuations.
Emerging markets should also be on the radar, although with caution in the case of China. There are numerous emerging countries with low debt, rates that are still high and growth rates much higher than those of developed economies. Cases like Mexicobenefited by nearshoring, are clear examples.
By sectorswe keep watching opportunities in defense and cybersecurity, energy and technological infrastructures, utilities, European finance, health, biotechnology and basic consumption. They are sectors that, due to their strategic or defensive nature, can perform well in an environment of economic slowdown.
In your role leading wealth management solutions, how is iCapital adapting its propositions to help clients manage risks while taking advantage of growth opportunities?
Our main competitive advantage is a truly global and holistic approach. We are not limited to portfolio management; We address both the tangible aspects, risk, asset allocation, structuring, and the intangible aspects, helping our clients define long-term investment policies and training families and subsequent generations to make more rational decisions, especially in times of stress.
The open, multi-bank and multi-manager architecture allows us to analyze different visions of the market and build more robust strategies, avoiding biases and closed approaches. This substantially improves risk management and opportunity identification.
In practice, We are reducing exposure to the financial economy to increase investment in the real economy, such as real estate and energy and technological infrastructure. We prefer to sacrifice short-term liquidity in exchange for protecting portfolios against abrupt declines resulting from emotional decisions.
Besides, We design investment policies based on personal objectives, beyond regulatory requirements. We believe that the greatest risk is not volatility itself, but a poor allocation of capital and the absence of a strategic vision accompanied by financial training. This comprehensive approach, without personalism or egos, is what allows us to offer solid and coherent management in the long term.