Transcript:
Caroline Woods
Joining me now, I’m Ahmed Riesgo, chief investment officer at Insigneo a mad. Great to have you here. Thanks so much for joining us.
Ahmed Riesgo
Thank you. Great to be here.
Caroline Woods
So we have some red arrows across the board right now Walmart seems to be weighing on the Dow down about 400 points. I’d like to kick things off by talking about retail because it’s been a big week for earnings. We’ve now heard from some of the biggest retailers after listening to all of them. What did you learn about the consumer this week?
Ahmed Riesgo
Well, not much new to be quite honest. We know that the sort of lower income cohorts groups in the country are not faring very well. They’re under pressure. We know affordability is the number one issue going into the midterm elections. So this whole concept of a case shaped economy is a very much a real one. And, you know, a company like Walmart reporting today is sort of the slowest sales growth they’ve seen in many, many years.
Ahmed Riesgo
It shouldn’t be altogether surprising. I know the stock is getting hit quite a bit here, at the open and in the premarket, but this really shouldn’t be much of a surprise. We know that, really, the the upper income groups are sort of sustaining consumption across the country. And a lot of this consumption is AI driven.
Ahmed Riesgo
We know that that’s not necessarily the case with lower income groups.
Caroline Woods
As we think about what that means from an investor perspective, where would you rather have your money right now? The consumer who has to spend or the consumer who wants to spend?
Ahmed Riesgo
Well, I’ll put it as a consumer that can spend and the consumer that can spend right now is, you know, one who is obviously high, highly tethered to the market. The market has done well. So the wealth effect has been very real. And and, you know, like I said, the the upper income groups that are not as impacted by the affordability issues that are ransacking, those in the lower parts of the income spectrum.
Ahmed Riesgo
Right. Those who are not affected when gas prices go up, as much, food prices because it’s a lower share of their budget. So those are the that’s a segment that we think will continue to stay strong. It’s one of the reasons, by the way, why we don’t think rates are going much higher from here. I don’t think the economy can tolerate it.
Ahmed Riesgo
And I think you sort of seen that sort of being telegraphed by Scott Bastian with some of the actions he’s done this week. So, I think this is something that’s very much in the minds of not just the government, but, you know, the central bank and other economic planners as well.
Caroline Woods
We’ll get to this or that at the end of this. But if you had to choose between discretionary and staples, then you’d choose what.
Ahmed Riesgo
Right now would be choosing staples. Yeah. And that’s actually the you know, the market has kind of bent that way. So if you want to be contrarian, you would go the other way. Problem is that we really don’t see a situation here where the economy kind of accelerates and rates come down substantially. That would give an impulse to the discretionary sector.
Ahmed Riesgo
So we still think it’s a little too early to to make that rotation.
Caroline Woods
There are a lot of risks hanging over this market. There’s the slowing consumer as you’ve described. There’s the potential for the fed to raise rates. Doesn’t sound like you think that’s going to happen. But we do have bond yields climbing. We have oil near $90 a barrel. We have geopolitical turmoil. Rank those risks from biggest to smallest as it relates to this market.
Ahmed Riesgo
Yeah I think by far the biggest one is what’s happening in the rates market. I think you know rising yields is is is one of the reasons that both the economy and the market could be undercut, the legs could be taken out, so to speak. So this is why I think you’re seen already, the government, you know, through Scott Benson, and potentially down the line with the fed starting to take action to address this problem.
Ahmed Riesgo
But by far that’s I think, the biggest risk, rising rates.
Caroline Woods
At what level on the ten year. Do the legs get taken out of the market.
Ahmed Riesgo
You know it’s tough to say. You know, Scott Benson is a is a hedge fund. You know, that that’s the world he comes from. So I think he’s trying to get ahead of this problem before it actually becomes a problem. I don’t think current levels are an issue. I think the worry coming out of Washington is that the trend continues higher and then, you know, above five, five and change.
Ahmed Riesgo
That could be a level that could be, you know, difficult for the economy to sustain.
Caroline Woods
Every bull comes on and points to strong earnings is the reason this market can power higher though. So do you agree? And are strong earnings enough to offset all of those headwinds including higher bond yields.
Ahmed Riesgo
Look at it. I think every bull comes on and says and sometimes that can be true. It really has been a historic really now two consecutive historic earnings seasons in terms of strength. I mean, the median companies growing their earnings 14% year over year. We haven’t seen that in years. And that’s not even talking about the outliers in the tech that are growing their earnings much faster.
Ahmed Riesgo
So strong earnings is actually making the fact that with rates going higher, the market has become cheaper. Right. Because you’re getting multiple, compression there rather than expansion. So, it’s one of the reasons why our, our target for the S&P has not changed. By the way, throughout the year it’s been at 7800. We briefly touched that a few days ago.
Ahmed Riesgo
We haven’t come off of that. So we we think 1700 is the level is the target for the S&P 500. We think that given the sort of support we’re seeing from the earnings side, rates at these current levels are not a problem. They will become a problem though if they go much higher from here.
Caroline Woods
Okay. So we have an S&P that’s just below 7700 right now. But as you said we have the S&P above 7800 for a brief moment in time earlier this week. What does that mean for investors who are sitting here thinking, well why would I invest in stocks right now then if we’ve seen the majority of the rally, why not just invest in bonds?
Ahmed Riesgo
Right. Well, look, that’s a very compelling argument. And I think bonds have actually become much more attractive compared to equities, especially given the recent moves. Right. It’s very it’s very rational for an investor to say right now, look, the US ten years pay me 4.7%. The equity risk premium is, you know, around 5% or so. I’d rather just take the 4.7% with the lower volatility on the ten year bond rather than the volatility of the index.
Ahmed Riesgo
So that’s I think, the case for bonds becoming much more compelling. And we would be rotating into bonds right now. However, if you know the case for equities in the long term has really never been stronger. So so I want to make that point. If you’re a short term tactical trade or a tactical investor, if you want to call it that.
Ahmed Riesgo
And you’re trying to sort of time this market. Yeah. Maybe it’s not such an attractive moment to get in, but if you’re a long term holder, if you’re looking out, you know, five, seven, ten years, you know, the equity market, continues to be a very attractive place. U.S. companies have never been better at making money than they have been right now.
Ahmed Riesgo
So I would even argue that historically, you would say, you know, right now the S&P is about a 20 times multiple. You know, that’s not it’s not expensive, but it’s definitely not cheap. I would argue that given the rate of earnings growth, that’s actually not necessarily a bad level, a longer term to get in here.
Caroline Woods
Let’s break that down a bit. First you talked about rotating money into bonds. Where is that money coming from? What areas of the market are you taking profits from to put into bonds. And then we’ll get into what areas of the market you’d be investing in right now.
Ahmed Riesgo
Yeah. So so if we look at it just set up, let’s say that the asset class level, on the equity side, I think it makes some sense to take some money out of the best performing sector, some of these sort of, you know, some parts of the EI complex that have done well and rotated some of the cheaper ones.
Ahmed Riesgo
We also like Europe, Europe, you this is not really a story that has been told too much recently, but Europe is actually growing their earnings, relatively close to the median level that that the U.S. is. This is something that hasn’t happened in years. And given how cheap they are, we think, you know, that’s a particularly attractive place.
Ahmed Riesgo
We also see, you know, some opportunities in certain emerging markets. We like Latam, x Brazil, you know, many countries down there, some, some of the Asian markets as well. India, I think, has rerated to the point where it’s pretty cheap. So there’s there’s equity opportunities beyond the US and within the US now in terms of, you know, sub assets, let’s say bonds into equities, you know, long duration, you know, on the Treasury side at these levels is starting to get very attractive and is a point where we actually think the ten year is going to end the year slightly lower from where it is today.
Ahmed Riesgo
The risk is that it doesn’t, which is why that’s my biggest risk. So, you know, I think a US ten year at 470, which is the level you’re seeing today, is an attractive place to buy. Another place that I like very much is the tips market, the longer term tips, you know, you’re getting paid around a 3% real yield on 30 year tips paper.
Ahmed Riesgo
That basically means the US government is telling you we’re going to give you a 3% real yield over 30 years. If you’re a pension fund, if you’re sovereign wealth fund, if you’re a defined benefits plan, for example, that’s a very attractive, real yield to lock in for very long term. So I’m assuming that they’re coming out here and buying this pretty aggressively.
Caroline Woods
Going back to your international call for just a second, what’s the best way for the average retail investor to invest in Europe and Latam? Is it through ETFs or is it through stock picking within countries?
Ahmed Riesgo
Yeah I would say it through a diversified basket either through ETFs or mutual funds. Remember the average investor doesn’t have the time to put in the sort of the due diligence that’s behind, you know, individual stock picking. So that is likely or should be outsourced to other professional manager. Or if you don’t find a professional manager that is worth the fees that you’re paying, right.
Ahmed Riesgo
If they’re not generate enough alpha, then you go through an ETF vehicle like a regional vehicle.
Caroline Woods
So bringing it back to the U.S., what are your highest conviction areas of the market right now?
Ahmed Riesgo
So, we really like the healthcare sector. And it’s been one of the sort of worst performing sectors. It’s underperformed throughout the year. So you mentioned earlier what would you rotate out of, you know, some some take some money out of the eye complex, put it into health care. We don’t think health care has even begun to really feel what the benefits of the dispersion of AI technology is going to be in the field.
Ahmed Riesgo
I mean, you saw the Moderna news just a few days ago. We think this is something that’s going to be coming down the pipeline across the board, because AI is radically dropping the cost of new drug discovery for these companies. So, and that hasn’t been reflected in the price. The healthcare sector has underperformed the entire year. So we really like the healthcare sector.
Ahmed Riesgo
That’s one that we really like, for example.
Caroline Woods
And what would you avoid?
Ahmed Riesgo
So so I won’t tell you what will avoid. I’ll tell you what we’ve switched. We’ve over the last 5 to 10 years, the sort of mag sevens, the hyperscalers, we’ve bought them for growth. Right. And that’s how we’ve generated growth, in the portfolios. That’s how we’ve generated excess returns. We’ve now switched and we’re using these hyperscalers as defensive positions within the portfolio.
Ahmed Riesgo
We don’t think the growth is going to come from these names. We think that they’re going to give you the defensive benefits, the balance in your portfolio that when and if things go badly economically, geopolitically, there’s a market dislocation. Those are going to be your stabilizers. So it’s going to you know, investors I think have to start making that switch where they start seeing names like Amazon, Google, rather than driving growth in their portfolios as actually being the defensive positions within their portfolios, almost like utilities.
Caroline Woods
Defending against what, a market downturn.
Ahmed Riesgo
Yeah, yeah yeah. We think those names will outperform if, if and when we go into recessions, when there’s a market downturn, we think the outperformance will come from those names. When the market starts ripping higher, we don’t think the growth is or the returns will be driven by those names.
Caroline Woods
So if I’m sitting in an S&P 500 index fund, where I have still a lot of exposure to the Mag seven names, where am I still underexposed to the market? That’s really been broadening into a lot of other areas outside of tech. Yeah.
Ahmed Riesgo
Yeah, no, that’s a great point. You’re underexposed to healthcare, you’re underexposed too, or you’re underinvested in energy financials. So the way to play this if you’re an investor is switch out some of your SPI potentially into the equal weighted index, for example, where you get access to the entire, equal weighted stocks rather than a market cap weighted.
Ahmed Riesgo
So we think that’s that’s a play that for this year, for the first time in a very long time, the equal weighted index is outperforming the market cap. We think that’s going to last for a long time. So I think that’s a smart trade to make right now.
Caroline Woods
I know you can’t talk or give individual stock recommendations, but I’m sure there are some people watching that are having some FOMO after seeing Moderna, as you mentioned, it was up, what, 175% yesterday. It’s coming off today, but still up close to 400% year to date. And thinking I have to find, you know, the next big winner. I want to find Moderna back when it was, you know, I should have invested when it was back in the 20s, not all that long ago.
Caroline Woods
What would be your advice to people who are just really trying to, you know, find the next name that’s going to rocket higher?
Ahmed Riesgo
Yeah. My advice would be don’t play that game because that’s not a game you can consistently win, right? You might get lucky here and there. But overall it’s it’s not a game that you’ll win. It’s kind of like, you know, going to a casino, you know, that the more you play, the more money you’re going to lose that the smart way to do this is to get a diversified basket in health care, for example, that has underperformed.
Ahmed Riesgo
That is still cheap. Despite what Moderna did a few days ago. Other names haven’t had the same, let’s say up move. And we expect that they will because they’re all going to benefit from becoming cheaper to do the research that in the past has, you know, cost them so much money. So the way to do it is to buy a health care ETF, for example, rather than try to pick an individual winner.
Ahmed Riesgo
Right?
Caroline Woods
Okay. We also just to bring it back to tech, we have Nvidia reporting earnings next week. What’s the number one thing you’ll look at or what’s the number that you’ll be looking at first to decide whether the AI spending boom is accelerating or starting to cool? And what would Nvidia have to say next week that would make you rethink the broader AI trade?
Ahmed Riesgo
You look so far, this this whole notion that demand for AI is cooling has just has just not been borne out by the data and has not been borne out by the earnings call. So it would be very surprising to us if Nvidia, announced some numbers or gave some guidance that that was happening. And I’m sure the stock would suffer if that were the case.
Ahmed Riesgo
But more than that, I’m focused on, these types of financing arrangements that they are doing. You know, that is one potential source of of risk in these markets. We don’t think it’s something to be systemically worried about yet. It’s by the way, it’s one of the reason why rates have been going higher is because now the U.S. Treasury is competing with Google, Amazon, and, you know, all these hyperscalers that are issuing long term debt.
Ahmed Riesgo
So investors are becoming more discerning and demanding higher yield because there’s been an influx of supply into that side of the bond market. So I’m going to be most focused on what are their sort of CapEx, plans and what type of financing arrangements, they are announcing or seeing in the future.
Caroline Woods
I want to ask you a question that one of our YouTube viewers posed. I think it was last week. And, I think this is good because, you know, a lot of the rotation that we talk about or take profits from here and put them here, assume that you’re already invested in and certain things so that the viewer said if you had $10,000 and had to start your portfolio over from scratch, what would you do?
Ahmed Riesgo
Well, I mean, a lot of that depends on, you know, how and when do you do you need that money? Is this money that you’re just sort of, you know, saving away for, you know, long term? If you’re young, if you’re old. Right. So it’s tough to tell an individual investor without knowing the circumstances of their, of their profile, what they should do with that money.
Ahmed Riesgo
Generally speaking, though, if I had to give sort of broad answers for this, I know your audience wants an answer. I would say the younger you are and the sort of the more that’s for kind of long term savings. I would have a much greater percentage of those of those, $10,000 should be in sort of broad equity indices and broad equity exposure, the more likely you are to need that money, either for liquidity because you, you know, you start living for a maid or you need it for actual to make purchases or something.
Ahmed Riesgo
The more you want to go into safe, stable things, where the returns aren’t is higher, but the volatility is much lower. Right? So that’s that’s that that might be a non-answer answer, but it’s the best I can do. Not not knowing the particulars of that particular investor.
Caroline Woods
But if the goal is growth and the time horizon is years versus, you know, two years to retirement, you put that money in the S&P 500 versus individual stocks.
Ahmed Riesgo
Well, I would I would not just do the S&P 500 because I think you’re at that point, you are, systematically underweight or under investing in markets outside the US. Now the US market is the best equity market in the world. Let’s make no mistake about it. U.S. like I said earlier, U.S. companies are better at making money than any other than companies anywhere else around the world, but they’re also relatively expensive versus some of those markets.
Ahmed Riesgo
So, I would have a sort of a more global equity exposure. So something like the all country world Index makes sense, which is already, by the way, if you buy the all country world index, about 60% is U.S. equities. So it’s not like you’re not getting U.S. exposure there. So I would look at global markets that haven’t or haven’t run up as much or aren’t expensive as U.S..
Ahmed Riesgo
So I would sort of go more globally than just focused on the U.S..
Caroline Woods
Okay. And just finally, before we get to rapid fire, you have a 7800 price target on the S&P 500, which is higher than where we’re currently trading, but not by much. So does that make you still bullish?
Ahmed Riesgo
I mean, it puts me moderately bullish I guess I’m not like, you know, salivating to get into this market if I haven’t been in it right now. Which, you know, we have we’ve told our investors to do so. We’re also not looking for an exit. We think if we’re going to be wrong, by the way, on that target, we think we’re going to be wrong to the upside, meaning that the market will end up trading up higher precisely because earnings have been so strong.
Ahmed Riesgo
Now, what could derail that is rates and or the geopolitical. I know we haven’t talked about Iran or Russia, but those are real risks out there that we can discuss. So I would on you know, I’m moderately bullish, I should say, given what’s given what the environment is. But longer term, I’m quite bullish on the prospects for stocks longer term.
Caroline Woods
Yeah. So just quickly what tell us what exactly would make you boost that price target and what would make you cut it.
Ahmed Riesgo
So what would make me cut? It would be if I would see a rapid move up in rates, our or our signal that the fed, for example, is going to start a hiking cycle. I’m not talking about, you know, one hike, like one hike is already priced into the market. In fact, you know, we got to a point where two hikes were priced in.
Ahmed Riesgo
That’s come off a bit. So the fed were to make some type of announcement or or communication. I know they’re shying away from that. But if they were to short of announced or telegraph that they’re going to start a hiking cycle two, three, four hikes that would that would cause me to become more bearish. And if we saw an escalation beyond what we’re seeing right now in Iran and or Russia, that would also potentially cause us to turn more bearish here.
Ahmed Riesgo
But we’re not expecting that that’s not our base case.
Caroline Woods
And more bullish would just be continued earnings growth correct.
Ahmed Riesgo
Yeah yeah yeah I don’t think the that the movement that or the returns that investors are going to continue to get here for a while are going to be driven because the discount rate is coming down because the multiples expanding. We think it’s going to be continue to be driven by earnings.
Caroline Woods
Okay. So if someone’s looking at, you know, the the Nasdaq down what 2.5% this week. Would you say that that’s a dip they should be buying then. Or are you wait for a bigger pullback.
Ahmed Riesgo
I mean again it depends what your time horizon is right. If you’re if you’re if you’re if your time horizon is days or hours. Yes I mean the answer could be absolutely yes. If you’re if your time horizon is three months, two months, probably not. If your long horizon is ten years. Absolutely. Yes. Right. So there’s a sort of a J curve here.
Caroline Woods
What if your time horizon is two years?
Ahmed Riesgo
Of course you had to give me a difficult question. We couldn’t end with that. Two years. It’s it’s more difficult, but I would say. I’ll tell you. All right, so let me throw in a longer term concern that I have, which is why that two year period that you picked is particularly pernicious, in my view.
Ahmed Riesgo
I have sort of high conviction that taxes are going higher in 29, regardless of who wins the white House or not, or what the breakdown is on the congressional side. And what I mean by that is I think corporate taxes are going higher. I think, you know, there’s, you know, the potential for wealth taxes. And I think, taxes on, higher income groups are going higher.
Ahmed Riesgo
So that gives me some trepidation that that two year window could be a window that’s a little bit, or has more volatility because of the issue of corporate taxes specifically. They are at historical lows. So these are low hanging fruit for politicians to increase, whether it’s Democrats or Republicans. I think, you know, I have pretty high conviction that corporate taxes are going higher come 20, 29.
Ahmed Riesgo
So, I’ll say pending what I’m seeing on the political side. But, you know, that’s an iffy, tricky window because of this.
Caroline Woods
Okay. All right. We’ll have to dig into that more next time you come on. I’ve been teasing it. So let’s get right into our rapid fire round of this or that. Quick questions, quick answers. No hedging if you can help it. Are you ready?
Ahmed Riesgo
Sure. Let’s go. Let’s do it.
Caroline Woods
Bring bringing it back to the consumer. Consumer strong or slowing.
Ahmed Riesgo
Slowing.
Caroline Woods
Stronger balance sheet Walmart or Target.
Caroline Woods
Walmart more likely to weather a downturn Lowe’s or Home Depot?
Ahmed Riesgo
Oh, this is a, Home Depot.
Caroline Woods
Who’s reading the economy, right? The fed or the market?
Caroline Woods
The market recession in 2027. Yes or no?
Ahmed Riesgo
No.
Caroline Woods
Next 12 months. Stocks or bonds?
Ahmed Riesgo
Both.
Ahmed Riesgo
Higher.
Caroline Woods
If I had to pick higher up.
Ahmed Riesgo
If I had to pick one, I would say bonds, bonds, bonds.
Caroline Woods
Bull market intact or fizzling intact. Broadening continues or mega cap comeback.
Ahmed Riesgo
Rodney continues.
Caroline Woods
Stock pickers market or index funds.
Ahmed Riesgo
Stock pickers market.
Caroline Woods
A market cap or equal weight? Equal weight I know you’ll say both, but U.S. or international?
Ahmed Riesgo
I do want to say both. But if I had to pick. But if I had to choose one international.
Caroline Woods
In Europe or Latam.
Ahmed Riesgo
Latam.
Caroline Woods
Bitcoin above 70,000. Opportunity or trap?
Ahmed Riesgo
Well we like bitcoin here. We have an $80,000 price target here in the short term. So you know I think it’s the opportunity if it’s at 70. Yeah.
Caroline Woods
Best place for money in the U.S.. The.
Ahmed Riesgo
Best place for money in the U.S.. In terms of the equities bonds. Give me, give me give me something a little bit more.
Caroline Woods
Yeah it’s it’s sector play equities.
Ahmed Riesgo
Oh sector play health care. Health care. Health care.
Caroline Woods
One word to describe how your feeling about the market between now and your end.
Ahmed Riesgo
Good. Like with a shrug. Sort of like, you know, little warm. You know, we’re kind of near our target. So we’re not super excited, but we still think there’s, you know, some upside here into your end.
Caroline Woods
And just to reiterate S&P price target by your end.
Ahmed Riesgo
7800.
Caroline Woods
Ahmed Riesgo chief investment officer Insigneo. Oh thank you so much. Really appreciate appreciate you playing along now.
Ahmed Riesgo
Thank you for having me. Appreciate it. It was fun.
Caroline Woods
If you enjoyed this street talk check out our full interview with Dryden Pence. He reveals the stocks he’s buying on the dips.
