Sebastien Page

Energy and metals stocks are preferred ways to get commodity exposure as an inflation hedge, given the oil supply shock and the need to diversify hedges beyond Treasuries.

Be short duration to protect against rising interest rates caused by inflation. Short-duration bonds are less sensitive to rate increases, making them a useful hedge in an inflation-volatile environment.

Move money from international to US large cap growth stocks as the best expression of the AI theme. Earnings growth is 28% for the next 12 months, margins are high, and valuations are below the 5-year average. These stocks tend to meet high bars.

Hedge inflation risk using a diversified portfolio: hold cash, be short duration, own real asset equities and metals/mining companies. Treasuries will not hedge inflation volatility; a mix of hedges is needed while staying invested.

Overweight U.S. large-cap growth stocks as the best expression of the AI theme. Europe is more sensitive to the energy shock, U.S. is a net oil exporter, large-cap growth earnings growth is strong (28% projected) and valuations are below the five-year average, not bubble-like.

Invest in real asset equities like energy and metal companies, which tend to benefit from rising inflation and serve as effective hedges. These sectors have pricing power and commodity exposure that can offset inflation risk in a diversified portfolio.

U.S. large cap growth stocks are attractive because their valuation is below the historical five-year average, the Mag-7 valuation is well below its peak, and forward earnings are at the highest in 25 years. These stocks tend to beat high earnings expectations, making them the best way to express the AI trade. The firm is moving money from non-U.S. stocks into this area.

TIPS are a key inflation hedge because Treasuries will not rally if inflation gets worse than expected. The firm holds TIPS as part of a diversified hedge portfolio.

T. Rowe Price is "barbelling" exposure. They note US Small Caps need rate cuts to perform, and they see a breakdown in correlation where Asia/Non-US markets are outperforming due to better valuations. With the US market concentrated and facing "AI Scare" volatility, capital is seeking diversification. Non-US Value and Small Caps (if the Fed cuts rates as implied by the "risk-off" bond bid) offer the best risk/reward for rotation. LONG Small Caps and International Value as a diversification play against US Tech concentration. Fed keeps rates higher for longer; global growth slows.