Hello and welcome to Download. I'm your host, Dave Richardson. I got to say, we've been doing this podcast for about five years now, and we have some great guests on, but I generally don't get too excited or starstruck by a guest that we have. But today is an exception. We got a very special guest with us, Kristy Akullian from BlackRock. Kristy, thank you so much for joining us. I've watched your interviews on TV. I don't even know how many because you're on TV all the time. And it's really exciting to have you on the podcast for some of our Canadian listeners to hear some of your thoughts around what's going on in global markets.

Thank you so much. I'm so excited to be here. Looking forward to the conversation.

So Kristy, let me get everyone the official title. You're the Director and Head of GPS Investment Strategy for the Americas at BlackRock. By meshing market signals with product solutions, your team seeks to deliver actionable insights on macro trends, investor positioning, and efficient implementation. You've been with BlackRock since 2010, and you have a BA degree in economics and English from the University of Southern California, and you're a CFA charter holder. Kristy, maybe I'll start with, why couldn't I get my daughter to go to USC? I really wanted her to go there. It's a fantastic school, isn't it?

It is a fantastic school, and it's a lot of fun to be in Los Angeles, too. So hopefully she ended up somewhere that she is equally excited about. But yeah, I definitely had a wonderful education, but also a wonderful time there.

Yeah, I wish I had met you before because I would have introduced you to her and had you talk her into going because I love Los Angeles so much. But it's such a great school. I really wanted her to go there. They have a great program for what she does. So you went to Southern Cal. What's your progression? How did you get into this business? Before your education, what gave you an interest in finance and investment? And then how did you get to where you are now?

Yeah. Just some small questions to start, right? No, that's perfect. I mean, like so many other people, it sounds like your daughter already knows what she wants to do and has a chosen profession in field, and that is impressive. I went into school a little bit uncertain what I wanted to come out on the other side. I majored in English first, and I added an economics major later throughout that process. But I've always been really interested in economics. I think if you asked the 19-year-old version of myself, my answer was that I wanted to write for The Economist. It seemed like the neat intersection of English and economics. I still threaten sometimes internally that I'm going to leave and go do that, too, if they'll have me. Still fascinated by really just the motivations behind what makes people make decisions. I've always worked in financial services. I've always been in California on the West Coast. I'm not naturally a morning person, I should say, so that has not always been the easiest. Start twangs anywhere between 4:00, 5:00, 6:00 AM, depending on the day. But I really do love the markets. And so I've spent the last 15 years, as you noted, in BlackRock. I've done a handful of roles within that, but really the bulk of my time has been spent within the iShares business and really specifically thinking about the ways that investors of all different types use ETFs for all different types of problems as well. So I spent almost 10 years on the capital markets desk working really specifically with some of the biggest global institutions as they thought about how ETFs could bring efficiency to their overall portfolio. Things like if a large state pension plan, for example, was using futures as the way to get index exposure, but maybe didn't actually need the leverage that futures gave them—they were paying for leverage they weren't using—they could find a more efficient and more cost-effective substitute by using ETFs instead. That work took me all over the world. I worked with clients in Asia and Australia and Europe, from superannuation funds to hedge funds and everybody in between. That was really how I grew up, specifically within this product world and seeing some of those benefits, whether it's cost-effectiveness or transparency or tax efficiency that ETFs can bring to all different types of investors. Now I spend most of my time in the Americas, Canada, Latin America and in the US. I work with a lot of financial advisors, RIAs, and institutions as well, but really just thinking about how people can build wealth, how they can retire, and what makes most sense for them, given their own objectives and how our products can be part of the solution to get them towards their financial goals.

And BlackRock has been so much on the forefront of creating all of these different options that investors can use to go really anywhere, anytime, any strategy. And so investing today is so different from when you started at BlackRock 15 years ago, and when I started here 30 years ago. It's a really amazing world for investors with so many more better options to manage their wealth and manage risk. Is it not?

Absolutely. I've seen so many different evolutions of how that has changed, and you've certainly seen even more. What's always interesting to me is that the world continues to evolve. Every time we think that this is the new toolkit that investors have to work with, something new and novel and interesting arises that maybe can improve either risk or return or both. Certainly, we've seen a lot of those evolutions in real-time, just in the pandemic and the post-pandemic era. There's always something new and interesting to talk about. Usually, the starting point of when I'm talking to investors who are thinking about retirement and building those balanced portfolios that they need to weather the different macro environments that we find ourselves in over time, it's really just about being deliberate. I think that some of the relationships that we've seen, whether that's between stocks and bonds or between how equity markets perform and how the dollar performs, we're just seeing so much upheaval and change between those relationships in the last few years alone, that there's always a conversation to be had just to make sure that investors are keeping all of those things in mind and putting together portfolios that can work in a variety of different environments as we do continue to see the world evolving.

Kristy, when I started here, we had a Canadian equity fund, a US equity fund, a bond fund that was largely in Canadian government bonds, and that was about it. Then we had a Japanese fund, which was a lay over from the 1980s, and that Japan was the place to be in the late '80s, and I arrived in the mid '90s. So that was all we had. And now, virtually anything you can think of, any area of the world, any specific niche that you want to get into. You were talking about option strategies. There's really almost everything available to investors, and not just in the US, but in Canada as well. As you say, it's a really interesting time. It's a chaotic time in many, many ways. It has investors really struggling to make decisions around their portfolios to really know, really clear on what they're doing. We see that here in Canada—and I know the numbers are similar in the US—more money sitting on the sidelines than we ever have. We've got so many Canadians, when interest rates popped up, moved to a high interest savings account or a guaranteed investment certificate. A CD, I think, is the US equivalent. A lot of that money has stayed there despite the market moving to all-time highs. Of course, we had one of the worst bond markets in history in 2022, and that's stung a lot of our more conservative and income-oriented investors. So they've stayed on the sidelines. We've got a lot of people who should be investors have become almost savers. There's a real difference between saving and investing, and we talk about it a lot on this podcast. Then on the flip side of it, with everything that's going on around artificial intelligence, quantum computing, you've got a whole other set of investors who are almost gamblers or speculators. What people really want to focus on is investing. When you look at the investment market right now, what do you think people should be thinking about and looking about? What are some of the trends that you're seeing with investors in the US and across the Americas?

Yeah, absolutely. You touched on a really important point in that difference between saving and investing is critical. I'm not going to say too many bad things about investors who make a deliberate decision to hold cash. Certainly, investors and everybody, as we're thinking about our own finances, it makes sense to hold some amount of cash for a rainy day, as we know. I think that that got really appealing as central banks globally, and the Federal Reserve in particular, had really raised rates to fight inflation, like you say, in 2022. If you just looked at the opportunity set that you had in front of you, you had a risk-free investment that had relatively high yields, and it wasn't necessarily a bad place to be. But the world is changing in a very significant way. We're having this conversation in August. I think that the biggest focal point for markets right now is what's going to happen with interest rates and what the Federal Reserve is going to do in September and for the rest of the year. We do believe that the Fed is going to cut rates in September. That seems almost like a given at this point, given how markets are expecting and traders are pricing this in, and some of the data that we've gotten over the course of the summer and indications that we've gotten from policymakers as well. If we're now in this world where we expect rates to come down—and we don't think it's just going to be in September, we think that there will probably be other rate cuts, at least one more, maybe more than one even for the rest of this year—now we find ourselves in this falling rate environment and cash is less attractive than it used to be. We think that it's a really important time, even for investors who maybe don't have the risk tolerance or don't have the time horizon that they want to go all the way into the market. Maybe they're not adding to equities at this point with the cash that they have set aside. That would be a pretty big swing for them. But we do think that it's time for them to probably step out a little bit and invest in bonds with a little bit longer maturity. So not cash-like instruments where you have really the front end of the yield curve exposure. But we think that the optimal spot to think about right now is the 3-7-year maturity range. So that's what investors would typically call the intermediate or the belly of the curve. We think it has a really attractive mix right now of not being such long-dated debt that it's really going to incorporate things like the deficit and expectations for inflation to be higher. There's a lot of noise as you reach for really long-term bonds right now. But that middle part of the curve we think is going to be better than cash in terms of when rates start to come down, we can actually see some appreciation there. We do think it's really important for investors to not just stay in the cash positions that they hold. We know investors are sitting on about $20 trillion of cash globally, so just a huge amount of money that is in things like money market funds and as you mentioned, CDs and other similar instruments. It's time for them to get invested. You want to do it before rates start coming down, otherwise you're going to miss some of the benefit of that. For investors who have a higher risk tolerance—I know that it can feel uncomfortable to invest in equity markets when they're at or near all-time highs—but a lot of the work that we've done is to say, what does happen when markets reach these all-time highs? And the answer most of the time is that they continue to hit more of them. We are really guided by the fundamentals of corporate profitability. What we've seen, especially in US markets from the most recent reporting season—so we just had companies announced Q2 earnings—is that those continue to be very, very strong, even if we do expect that the economy is going to slow a little bit in the next couple of quarters. Just to give you a couple of numbers and a couple of examples, for all of Q2, if you look at the companies that make up the S&P 500, the expectation was that those companies were going to announce about 4% earnings growth, which was a solid number. People were comfortable that earnings was at least growing, even though it feels like a chaotic time, as you mentioned. Now where we sit looking back—we've gotten almost all of those companies to report such that we can calculate what the real number was and not just the forecast—it looks closer to 11 or 12%. We're still seeing companies be really, really profitable and be able to navigate some of this uncertainty around things like tariffs or is the labor market slowing down and is the economy slowing down? And they're still translating that into strong revenues and strong profitability. And that's what's pushing markets higher. So we feel comfortable participating in markets that are being pushed higher by earnings more than we feel comfortable getting into equity markets that are being moved higher because of valuations. So we are still constructive on risk. Even though, again, it feels uncomfortable to put money in just the things that have been working lately, we do still prefer large caps. We do still prefer growth over value, and we still see a lot of profitability and earnings' potential from the tech sector. I think where we're more cautious is some of the more speculative parts of the market. Obviously, a huge driver of markets is the AI trade. In some ways, it feels like everybody that's associated with the AI trade, their stock just goes up. We like being more selective than that. We still see most of the benefit accruing to the bigger, those mega tech companies who are creating and providing the AI tools that other companies are becoming the consumers of. We're still staying away from small caps. Small caps, they tend, again, to be more speculative in nature They're less profitable overall, so less fundamentally driven. When small caps move up, we haven't seen it because of profitability, we've just seen it because of speculation. Then the other thing is just that small caps really tend to do the best in the type of macro environment where we're coming out of a recession. We don't think we're there. We don't think that we're going to see growth accelerate. We think it's going to decelerate but stay positive. So staying relatively up in quality within equity markets within the US and Canada can still really make sense to us, given that bigger forecast we have for the economy.

Yeah, and I guess if we go back to your thoughts around interest rates and fixed income, the Fed started cutting rates last September, and that was a signal that you wanted to get out of some of those cash positions and take advantage of what was going on in fixed-income markets and for stocks as well. Now, looking forward, we know that earnings have ended up being a little bit better than we may have even expected. When you look at a year from now, is that where you still see earnings being strong after maybe a little bit of a slowdown in the economy, as you mentioned, over a couple of quarters? We likely see rates lower than they are right now, especially if we have that slow down. But there's always the risk of inflation and the Fed's still concerned. What are you concerned about? What are the big risks you see or what could throw your view of being constructive and somewhat positive that strength begets strength, that could throw that off over the next few months?

Yeah, certainly. Investing is never without risks, and there are certainly risks going forward. On the earnings front, at least as of right now—I talked a little bit about what Q2 earnings looked like—the other really important thing that we heard from managers and CEOs and CFOs, I was talking about their company, the way that analysts reacted to that is that their forecast for earnings next year were actually raised pretty significantly as well. It's not just about the backward-looking metrics, it's also, to your point, very much about the forward-looking ones. I think expectations which had gotten much lower after April and a lot of the trade policy uncertainty that we've all lived through over the course of the spring had gotten so low. And expectations were really that it had the potential to really weigh on corporate profitability. When you've seen that trajectory turn and expectations are turning higher again. So I do think it is good that companies are figuring out how to navigate through some of this uncertainty. And we are in or past that peak uncertainty period where we had very unclear answers in terms of where we were actually going to end up with some of this trade policy. On the forward-looking metric, companies still have a lot of different levers that they can pull to defend their margins. Obviously, one of the big ones—and not one that we hope to see—but they can rightsize their labor force, they can trim where needed. But we've seen them get very creative in terms of other ways that they can cut costs as well. They've been very diligent around protecting margins, and I think that that has gone a long way to supporting equity markets to all-time highs. But that said, if there's two risks that come up in every investor conversation that we have right now, the first one is around valuations, which are admittedly higher than they have been on average over the last 10 years. The second biggest risk is around concentration. I would tell you I'm more concerned about the latter than the former. When we look at valuations over time—if we're looking at something like a PE multiple—yes, the S&P 500 trades above its long-term average. But I would also say that the composition of the index and the market overall have really changed significantly where they are much more growth-focused, and we're seeing much stronger growth come out of those companies. Growth companies always traded a higher multiple than value ones. It is not the same index today as it was 10 years ago. In some ways, it's not totally fair to compare the PE today to what we saw 10 years ago. The valuations point, I certainly take. I think it also is not a very great predictor of what's going to happen in the next 3-6-9-month period. It can be a better forecast for longer term. You don't necessarily want to get into a long-term investment at very high valuations, even if we think that these valuations are somewhat justified. I think the concentration question, though, is the more important one. Really what we see as the driver of so much growth in performance in equity markets in North America and in other pockets as well, but primarily in US markets, is AI. That concentration, really, we see the S&P 500 as the most concentrated has ever been. Whether you look at what the relative makeup of it is in terms of the top 5 or the top 10 stocks within it and just how much of the share of the overall market cap they make up, almost all of those metrics point to now being the most concentrated. We don't want to get out of that AI trade because it is such a source of phenomenal growth, and it is driving phenomenal returns. But I think what can be really important is looking at your portfolio more holistically and trying to figure out where you can add diversification outside of that. For us, I think the biggest opportunity that we're talking about is going international. You have so much exposure to growth stocks and to the AI trade in the US, and we still, to be fair, I would say, have a bit of an overweight to US equity markets because of that growth and because of that strength. But we like going international developed markets and probably Europe in particular for some of your value exposure. There are obviously different themes and trends that are playing out in select regions and countries across emerging markets, too. I think that that is so important in this environment where you're just seeking differentiated sources of returns so that your whole portfolio isn't really tied to the same trade. I think that's the bigger risk and also how we're trying to counter it right now.

We look at Canadian investors, and I know US investors are the same, that we're most comfortable close to home. We've got, again, Canadian investors, lots of cash and a lot of exposure to the US in particular. And still, a regular exposure to Canada. Do you really think we can move to a period where the other markets around the world outperform the US? Or do you still think the US has an edge, even with the valuations, just because of the nature of that market and the nature of your economy in the US?

I do still think that US markets are going to have a bit of an edge. But the thing that I would separate here is that you can have access to US companies and US stock markets, but maybe you don't need as much access or exposure to the US dollar. That's a really important big relationship change that we've seen this year is that US markets can move up at the same time as the US dollar can move down. I do think that some of that questioning of that American exceptionalism trade that probably hit its peak at the end of last year and coming into this year was certainly challenged by outperformance of other markets. I think that some of the lasting takeaways that we're going to take from that are just that maybe the dollar is a less consistent safe haven asset or source of ballast, and especially in growth stocks. I think for Canadian investors in particular. Now, we used to think of it as you buy access and you have exposure to US equity markets, and you probably also just want to leave that US dollar exposure because it can be an important ballast or a diversifier in your portfolio. It could actually be now a new source of risk. I think even within the question of, should I allocate close to home? Should I allocate to the US? There's another layer of questions that comes up beyond that for Canadian investors. But even having said all that, I still think that there's a really important role for international outside of the North American equity markets. A lot of the work that we do isn't just on the macro comparisons of looking at how Europe's growth is and interest rate differentials and things that are obviously the foundation for most of our preferences in terms of where to allocate. We also look at investor portfolios. We speak to and we're engaging with investors all over the world. What we find is exactly what you mentioned, which is a very significant home market bias that in a lot of ways has been hurting investors, particularly in the last year or two. Really making space in your portfolio to add international equities can just be another way to be more deliberate about adding diversification, especially if you're worried about the concentration that you're getting in Canadian markets between just a couple of sectors or the concentration that you're getting in US equity markets with the very large exposure to that AI scene.

Yeah, it's almost hard to believe, particularly when we're at this point in the cycle, which is an extended cycle around US versus CAD, that the Canadian dollar might ever exhibit any strength against the US dollar. For those of us a little bit older, we can remember the Canadian dollar at par a couple of times in my lifetime. So it does happen, but they're extended cycles. But also for an investor to think even beyond that, think about the Euro, other currencies as well and exposure there, particularly if you're retiring and say you're someone who wants to travel around the world. Having that different currency exposure is really important in the face of what I hear what you're saying and what other analysts that I listen to are saying is an expectation that the US dollar is going to weaken or struggle against other currencies in the near to mid-term.

Yeah, I think that's right. It's exactly how we would put it, too, is just having exposure to other currencies can make sense and maybe not assuming the defaults of, I think, how investors had gotten comfortable building portfolios over the last 10 plus years. Because we know, again, that a lot of those relationships are changing and we're going to continue to watch to see how long these cycles can last.

I try to remind investors that we were sitting here in the office back in 2011, and the Canadian market had outperformed the US market significantly for about a 10-year period at the time. We had an overweight on the US at the time, and the investors just finally abandoned us. They gave up. It was when the last investor gave up that I went, okay, well, we're about to go on an extended run of the US being the place you want to be relative to Canada. Now, 14 years later, you're almost getting to the opposite end of that spectrum. And again, when you're at the extremes, it's hard to believe because of that recency bias, but that's sometimes when you need to start to think about that diversification and other options that are available to you.

Absolutely. I completely agree.

Kristy, maybe we'll wrap up with just a general overview of how you're recommending investors position their portfolios. Given your expectations over the next 12 to 18 months and what you're looking at right now, what do you think is the best course of action for, say, a balanced investor to position his portfolio?

A lot of the threads that we've talked about, we've ranged across different asset classes in this conversation, but probably unsurprising given that we are still fairly constructive on taking risk. We do see global growth as still being positive. And not to overthink it too much in terms of growth is still positive. Interest rates. Most indications are that they're coming down, where we are benefiting from some form of fiscal stimulus in terms of tax cuts here and potentially deregulation. There's a mix of a lot of different ingredients for equity markets to like. And so we do think it's important that investors are taking enough risk to meet their overall return goals. I think if there is one consistent area that we find in terms of conversations with investors, if they're deviating from their goals at that they're not taking enough risk. Even though the world feels uncertain and chaotic in certain places, making sure that you're doing so in different parts of your portfolio is really important. Then the other is, be really deliberate about that risk that you take to make sure that it's diversified. We're in this new world where inflation is a more sticky and structural part of the landscape that we're evaluating, going forward as well over the last couple of years, it probably makes sense to be very deliberate about your diversification, especially in so far as we're seeing stock/bond correlation has primarily been positive over the last couple of years, and you're not necessarily getting the same amount of ballast or diversification benefits of just allocating to core bonds as you were in the past. So whether that means bringing in alternative strategies or asset classes or even not just being more active about how you manage your fixed income exposure—because we've seen a real breakdown in which parts of the curve provide the best diversification benefits to stocks—I do think that this environment calls for being a little bit more active and nimble, and you can certainly do that in the ETF wrapper as well. So making sure you're taking as much risk, but also making sure that you built in some deliberate diversification across the whole portfolio view as well.

Yeah, exactly. The one quote I love is, don't overthink it. So with my daughter, you can go to a great school like USC with a fantastic program and what you want to specialize in. You can go to the beach. You don't have the Canadian winter. Don't overthink it. She overthought it. As an investor, interest rates are falling, profits are strong, economic growth is good, and there's some other things that could even push economic growth to be stronger when you get a year out. Don't overthink it. And what I also love about your comments is, make sure you've got that diversification. You've got quality, but make sure you're taking some risk in the portfolio and investing, not saving and not gambling.

Exactly that. Couldn't have said it better myself.

Oh, you probably could because you've got that English major. I decided to balance out my finance with chemistry, which did not work very well. I'm not a chemist. I probably should have done the English degree. Anyways, Kristy Akullian, again, real treat to have you on. I hope you'll join us again when we extend the invitation. It won't be an if. Just absolutely great stuff. And thank you so much for joining us.

I'd love to. Please do have me back. I would love to join anytime. Great conversation.