[MUSIC PLAYING] Some investors have questioned the wisdom of the 60-40 portfolio strategy. It was a challenge by aggressive central bank rate hikes. But as we perhaps reached the end of the hiking cycle, does the 60-40 strategy deserve another look? Joining us now to discuss, Jitania Kandhari, Deputy CIO of the Solutions and Multi-Asset Group, Head of Macro and Thematic Research for Emerging Markets Equity, and Portfolio Manager for the Passport Equity strategies at Morgan Stanley Investment Management. Great to have you on the show. It's your first time. Welcome to the program. Thank you for having me here. Since it is your first time, and obviously you wear many hats at your shop, tell us a little bit about your areas of study and research. Sure. So I started my career in emerging markets. I belong to one from India, so very passionate about the asset class. I've been responsible for the country allocation, macro thematic work. A few years ago, I took on a global equity portfolio management, which is everything outside emerging, ex US. And in the last year and a half, I've been told to be part of the CIO office, use all my macro, thematic, and strategic thinking as a deputy CIO in our Solutions and Multi-Asset Group, which is strategic client customized solutions, based on their asset liabilities, their long-term strategic goals. So lots of interesting things happening on the macro front. A lot of people are interested in macro, and they have been for the past little while, because there's a lot going on. Let's talk about the 60-40 portfolio. We get questions about this quite often because, of course, it didn't work in 2022, given the environment. What should we be thinking about that strategy now? Yeah, so I think it's really important to understand a little bit of a history of this combination, right? So if you go and look at 200 years of history, which is what we've dug into from 1820, the general norm-- and I have a chart here to show the viewers-- the general norm, historically, has been a positive correlation between bonds and equities. So the last 20 years, actually, have been an aberration, and we've come back to positive territory. Now, what is important to note is that this kind of a dreadful return of the last year, where both stocks and bonds were negative and bonds could not act as that diversifier and that hedged asset class, that outcome has happened only 16 times in the last 200 years. So only an 8% probability. So by betting against that portfolio, you're going with a 92% odds of not winning. So the outcome of that dreadful year, if you go by history, the second and third year after that has always been positive. So just a historical perspective. But coming to where we are today, yes, the bonds as a "diversifier," that impact will come off in this current situation of higher for longer rates, but it is a good starting point. And it's important to understand and keep in mind that the risk-adjusted returns from here will be lower than the average 8% that have been yielded by this combination. And you need uncorrelated return streams. So therefore, using that as a starting point and buying some of the uncorrelated returns, like inflation hedges, real assets, even hedge funds, is the way we are advising clients. So more diversification with that as a starting point and going from there. I know when I talk to people who study the fixed income space, as well, they say there is a difference now, after everything that we've been through, that that part of the portfolio, even though rates may stay higher for longer, you're actually getting a yield, a coupon now, on your bond that you weren't getting a year and a half ago. Yes, it's been a dream era for yielding 5% on short-term. High-quality credit should be the way to invest in the fixed income space because that will benefit-- if there was a recession, that kind of hedges against that. Since 1872, US has had 30 recessions, and in each of those, bonds have yielded positive nominal returns. So if we are getting into a recessionary environment, even though mild, bonds should be a good diversifier. And also, if you look at this year, the emerging market local bond index is up 5%, even though the global Barclays Agg, which is the developed market equivalent, is down 50 basis points. So there's a lot under the hood and there are a lot of opportunities. It's like, what in the 60-40 should you be buying at this stage of the economic and market cycle? All right, let's talk about that. With that in mind, what areas of equities or fixed income do look interesting in this environment? So as I said, in equities, I do think that US seems stretched. I have a chart here on the contribution of the top sector to total returns in the US, and we can show that later. That seems stretched. So if you look at the US market, the year-to-date performance is 17%. But US ex Mega Cap 7 is up only 3%. And if you look at even the emerging market asset class, the total index year-to-date is up 5%, but ex China is up double. Europe's outperforming even the US ex Mega Cap US sector. So there's a lot going on under the hood, and we do like pockets of the ex US space. Even within US, the equal weighted index is looking very interesting, because as you can see in the concentration chart, if you can pull that up, the contribution of the top sector to total returns, this is the highest in the history since 1975. You've had four or five instances, and from these levels, that return contribution always comes down. So I think that it will spread out wider, in terms of the performance in US. Pockets of emerging markets ex China look extremely compelling for various thematic reasons we can talk about. And even in Europe, which is 50% of MSCI Europe, earnings come from outside Europe. So what's really happening with the domestic economy, in terms of inflation, in terms of recessionary environment, is not a true reflection of what European earnings can do, because the euro, which is very cheap, can actually be a big kicker to overall MSCI European earnings. So we are finding pockets of opportunities outside the US, even within US, outside of the Mega Cap. Of course, there will be different leaders, even in this decade. Every decade has different tech leaders. And we really want to diversify out. So that's on equities. And on fixed income, as I said, shorter end, higher-quality credit, pockets of emerging market debt, both local and sovereign, because they've really fixed their economic house and put that in order. And also, just across the spectrum, real assets, infrastructure with all the investments that are happening, commodities as an asset class. So there is a lot of opportunity, even in this dismal environment that people are projecting. What are the risks here in this [INAUDIBLE]?? I only think in the sense that as we began the year, we knew the banks had been hiking interest rates aggressively. It had hit the tech stocks. Not a lot of people said we think they're going to continue hiking aggressively, yet the tech stocks in the States are going to soar. Sometimes things happen, to my mind, that work out logically sometimes. Is that maybe one of the risks here? I think the huge tech boom was like the AI boom, which was unanticipated. And that kind of positioning there was also extremely low in October 2022, when the rest of the market, and other parts of the world, started rallying. So I think there was a lot of that happening. I think the risk, clearly, is a hard landing in China, which seems improbable, given what's going on there; a risk of a policy mistake by the Fed, because that can really disrupt a lot of the asset class assumptions that we're talking about; and a geopolitical event globally, which generally tends to lead to market gyrations in the medium term whenever there is a geopolitical issue. So I think these are the risks that we are constantly focused on and watching very closely.