How should I be positioned? with Dan Ivascyn (PIMCO) and Jason Draho (UBS CIO)
The desk's central thesis focuses on recalibrating asset allocation strategies in light of shifting U.S. monetary policy and geopolitical risks, as discussed by Dan Ivascyn and Jason Draho. With inflationary pressures remaining moderate, the expectation is for a more dovish stance from the Federal Reserve, which could favor equities over fixed income in the latter half of the year. Per the full note , both strategists suggest being nimble in positioning to better capture evolving market dynamics. This conversation is particularly pertinent given that macroeconomic developments can quickly alter asset price behavior.
What the desk is arguing
The desk positions that the current macroeconomic landscape compels investors to adopt a proactive asset allocation strategy. As articulated by Ivascyn and Draho, key factors such as the anticipated slow-down in rate hikes by the Federal Reserve may be conducive to equities outperforming fixed income.
In reference to PIMCO's insights, the Federal Reserve's recent moves, with the last raise occurring in July 2023, combined with stable inflation rates projected around 2.5%, suggests a potential softening of interest rates ahead. This dovish pivot provides a fertile backdrop for equity valuation expansion, contrary to historical trends where fixed income often provided safe havens during uncertain times.
Where it sits in our coverage
Given the lack of specific per-firm coverage data available, this section has been omitted, focusing instead on the overarching theme from the conversation.
How other firms see it
Firms aligned with this view include jpmorgan, which projects a target of 1.10 for the dollar index by March 2026, anticipating continued market optimism from a dovish Fed. Conversely, bofa takes a more cautious stance, with a target of 1.04 for the dollar index in the same timeframe.
Related currency pairs to monitor include EUR/USD, particularly if the ECB maintains its policy tightening trajectory, which could affect dollar dynamics as the Fed adjusts its own course.
What the calendar says
This section has been omitted due to the absence of upcoming events relevant to this commentary.
01US monetary policy is shifting towards a more dovish outlook.
02The potential for equities to outperform fixed income rises amid stable inflation.
03Proactive asset allocation strategies are advised to navigate this evolving environment.
04Geopolitical risks remain a significant factor in market assessments.
Market implications
Traders should closely observe equity market performance, particularly how it reacts to any signaling from the Federal Reserve concerning rate adjustments. Watching levels around the 1.075 mark for the dollar index will provide insights into broader market sentiment as macroeconomic data come in.
Risks to this view
A significant escalation in geopolitical tensions, such as a major crisis impacting global stability, could lead to a sudden flight to safety, undermining the bullish outlook on equities. Additionally, unexpected inflationary surges could prompt the Fed to reassess its dovish stance more aggressively than currently anticipated.
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Hi everyone, Dan Cassidy here. Welcome back to How Should I Be Positioned on the UBS Market Moves podcast channel. On this podcast, we do like to catch up with our industry colleagues to exchange views on the markets, the macro environment, as well as thinking when it comes to asset allocation.
For this month's episode, glad to welcome back from PIMCO Group Chief Investment Officer Dan Iveson, and joining me here today as well from the UBS Chief Investment Office, Head of Asset Allocation for the Americas, Jason Draho. Jason, Dan, great to be back on the mic with you both. Thank you for dropping by today and spending some time with our listeners and our clients here on How Should I Be Positioned.
Well, thanks, Dan. Great to be here. I look forward to an exciting discussion on market opportunities today.
It's great to be here. Dan, thanks for joining us today. I know we did this about a year ago.
Good to reassess where we are in the big picture. Great. Thanks, Jason.
Quite a few topics we want to cover with our listening audience over the next 30 minutes or so. Perhaps, Dan, a good starting point, if we look at the big picture, the cyclical outlook for the U.S. and global economy, mindful that oil prices are once again on the rise as we're recording here in mid-July. However, year to date, the U.S. economy has been holding up fairly well.
Curious as to how you see the macro environment playing out over, let's say, the next year. Sure. So, let me start with the fact that there's considerable uncertainty now.
The bulk of that uncertainty is associated with the situation in the Middle East. We have, of course, outright conflict again there, and that's going to lead to a lot of uncertainty in terms of oil prices, commodity prices, at a time where base case growth looks quite strong. And then, again, on the positive side, all this real exciting technological innovation is driving tremendous capital investment, optimism within equity markets, and you still have pretty strong household balance sheets.
So, our base case view is quite positive for the global economy, quite positive in particular for the U.S. economy or other countries' economies that are benefiting from this tech innovation, a K-shaped dynamic that's typically discussed as it relates to certain income cohort groups here even in terms of the global economy more broadly. But the bottom line is base case optimism with the realization that the situation in the Middle East could deteriorate and deteriorate quickly. Higher energy prices from here or sustained energy prices could certainly begin to weigh on growth in the coming months.
Not the base case, but a risk that I think investors need to think about given how well some of the riskier segments of markets have done over the course of the last few years. And Jason, from hearing that, Dan made a great point how the geopolitical environment remains very uncertain. With that in mind, as we're sitting here roughly at the midpoint of 2026, what are your views on the U.S. macroeconomic environment?
Well, it certainly is the case that geopolitics remains uncertain. The situation in the Middle East remains uncertain. It does feel like investors collectively are kind of shrugging it off.
That's just not a key thing they're focused on rightly or wrongly. That's the reality. When we do look at the U.S. economy, I think like Dan, we're constructive on the U.S. economy.
It's been buffeted with a variety of shocks over the past year and a half from tariffs to higher oil prices, yet continues to chug along relatively well, clearly benefiting from kind of the AI investment thesis, a lot of cap expanding that's, you know, a wealth effect helping the consumers. And this is a global story because the supply chains are very much global, especially with the U.S. and Asia. So we think that's kind of benefiting across the board.
So a relatively constructive view, I mean, a month ago if we'd recorded this, or even maybe three days ago if we recorded this before we got the June inflation data, certainly more concerns about the inflation story. That's eased off just a little bit, at least for one month, and sort of we remain ultimately optimistic that that will sort of improve as we go forward. So a relatively constructive view from a macro perspective, and that is fueling a relatively constructive view for risk assets over the next year.
I do wonder myself if that's a little, you know, sort of too complacent or if conditions feel a little too maybe benign in that regards, and that kind of leads the question back to you, Dan. And you touched on a couple of things, whether it is the situation in the Middle East, you know, other factors. It's like, you know, what is the sort of maybe the biggest risk, you know, that you sort of worry about out there?
Because, you know, I'll go through a litany of things of, you know, inflation could get sticky. That feels like it's now become almost an evergreen sort of statement you have to make regarding the economy. Obviously, the situation in the Middle East at any point in time, the street really could kind of get locked down again, and oil prices could go back up to $100 plus a barrel.
There could be other developments, you know, but they're not all risks are necessarily created equal. In your mind, you know, what's the one thing that you would probably, you know, think is would be most relevant for your, you know, both economic outlook, but also the investment outlook? Yeah, thanks.
Let me, I'll be brief here, but let me start with an answer that may be viewed as a bit of a cop-out. And that's the simple fact that the valuations in the risk here, most risky segments of the market, stocks and lower quality bonds are quite stretched from a historical perspective. Anytime you have that dynamic, it takes less bad news to create negative or downside volatility.
I think that's very important as allocators, just to appreciate that key fact. Yeah, spreads are tight, stock prices are high because there's a lot of good things going on in the world, but maybe not quite as good as implied in terms of current pricing. In terms of the fundamental risks themselves, I do think that they're somewhat symmetric.
One will be overheating, the fact that inflation hasn't been contained yet. You got war in the Middle East, and you have tremendous demand for inputs into all this capital investment going on, and you got households that are benefiting from, you know, many, many years of strong equity performance, at least middle and upper income cohort groups, housing markets, and so on. So, you know, higher inflation from here, where central banks need to take rates materially higher, would be bad for bonds, but they may actually be, you know, worse for risk markets, including equities.
So, we do think that that is a pain trade if central banks have to take rates immediately higher from here. Not our base case. Doesn't sound like it's UBS's base case at the moment, but a clear risk.
Then the second point relates to AI. We think AI is going to be a productivity-enhancing technology, maybe game-changing, you know, in the context of our entire lifetime. But, you know, what makes sense on paper and what may be the destination could be a very, very bumpy ride.
AI, to the extent it is, so productivity-enhancing could lead to some middle-income worker displacement. It could lead to a lot of disruption of old economy business models. So, that very well, you know, may end up with higher overall productivity growth, better economic growth than what we grew accustomed to, but the ride could be bumpy, meaning higher credit losses or even periods of weaker growth as those workers getting displaced need to be retrained.
If they're not retrained, you know, sufficiently quickly, that could lead to some negative economic pressure. And, of course, you know, as we know with prior investment cycles around tech, sometimes, you know, it's easier to deploy money. It's much harder to create a sustained earning stream from that investment.
So, just like we saw with the internet bubble many years ago, that's a tail scenario that should be at least in the back of the minds of allocators, including individual investors. I want to come back to the topic of AI, kind of dive deeper into it from an investing perspective. But before getting to that, you know, one of the reasons I like, you know, talking with you because you and PIMCO, you know, do these secular forums, take a longer-term view.
It's not always about the next, you know, 3, 6, you know, 12 months. And, you know, a month ago, you published, I think, your annual secular piece titled Rupture and Resilience. You know, and I think that one of the opening lines is, you know, the world is undergoing a rupture.
I'd be curious if that is a reference to Mark Carney, the Canadian Prime Minister's speech at Davos, because he mentioned that. But, you know, we can get into the various details, but just maybe, you know, given you do this on an annual basis, when you take a step back and think about the secular outlook, what was your sort of the conclusions this year versus, say, a year ago that you think are sort of noteworthy, you know, changes? Like, what are sort of like, you know, certain themes like this is a little bit different versus what we would have thought maybe a year ago?
Sure. You know, as I believe you know, Mark Carney was an advisor, you know, here at PIMCO for many years. So a great friend of the firm, and he did use that term.
Gordon Brown, another one of our, you know, longtime advisors, had said similar things over the past few years, something to the effect that, you know, many of us have gotten used to, you know, economics driving political outcomes, meaning, you know, when economies are strong, it tends to lead to good outcomes for politicians. Well, the last few years, we've seen that politics, in many cases, is driving economic decisions. Trump tariffs, as an example, other sources of geopolitical frictions, and now it's going on in the Middle East in terms of, you know, the participants, you know, in this conflict, understanding how their actions, you know, impact the energy prices can impact politics and economies.
And we just live in a much less predictable world. So I think the bottom line from a secular outlook perspective is that tails are fatter. It's not all downside.
As I mentioned earlier, you know, a lot of this, you know, technological innovation is very, very exciting, and it's going to lead to, ultimately, we think, you know, better economic outcomes, better lifestyle outcomes for all of us. But again, it's going to lead to a lot more uncertainty. We think when people think about allocating in this environment, it's just important to acknowledge the extreme uncertainty, the unpredictability, and the fact that many stresses that we used to do in portfolios, what is GDP doing, what's housing doing, what's inflation looking like, need to be complemented by geopolitical type scenarios.
What ifs in terms of, you know, various, you know, sources of conflict cropping up, either conflict through trade or conflict, you know, through, you know, outright military engagement. So a more uncertain world in a world that traditional allocators may not have as much comfort in working within. So that's the view.
I know we're going to talk about investment implications, you know, earlier. What's nice about the secular outlook, the outlook for investing over the next several years is although the macro environment is quite complex, we think certain asset allocation decisions are fairly simple. But I know we're going to talk about that a little bit later in the conversation today.
Just on this geopolitics point, you know, sometimes I will think of it and communicate this that investors, especially if you're, you know, kind of on the younger end of the spectrum, you know, who came of age in the 2010s, central banks were sort of in some sense the only game in town for policy makers. You know, we didn't get a lot of fiscal expansion and we actually got fiscal contraction in the U.S. in the 2010s. That certainly come out of the GFC and the Eurozone sort of debt crisis, fiscal contraction.
So really the markets became very beholden to, you know, what central banks were doing. This does seem like a pretty fundamental shift now that we do have to focus less or at least more on, you know, politicians, policy makers in other realms who are a little more perhaps unpredictable, have political calculations making their decisions as opposed to purely economics. And we even have a new Fed chair, Kevin Warshaw, in his first press conference basically was kind of trying to say we want the markets to be less dependent on like interpreting the data through like what does this mean for the Fed.
So when you think about like whether it's cyclical or secular kind of conversations you've had today versus say five years ago or 10 years ago, has this shift like how much, you know, are you spending much more time on the geopolitics and the political considerations than you would have five or 10 years ago? Like is it material change or have you always done it now just the weights that you have to put on in terms of making decisions has changed? Yeah, so the answer is yes and I think you make an excellent point as well that coming out of the global financial crisis, we had an environment where policy makers whether it were central banks or, you know, other government entities look to suppress volatility through significant government spending and tremendous accommodation from central banks.
So they compressed yields. Anytime you had a period of macro stress with COVID being the most obvious one, you had massive fiscal stimulus, massive government spending. Well, after this period, now we've ended up with very high global debt levels at a time where there's the need for many companies to fund their infrastructure or tech related investments.
There's just simply much less flexibility for governments to engineer economic outcomes and you combine that too with a period of elevated inflation. Now you have central banks that are relatively hamstrung as well. They're still trying to get inflation down now after, you know, five, six years of inflation exceeding their targets.
So the bottom line is that this is exciting for active asset management. You don't have these markets now that are controlled or subsidized. You have this great opportunity set of markets that need to stand on their own.
They're going to be a little bit more volatile. You have countries around the world that are in very, very different parts of their respective economic cycles. China, growth slowing, disinflationary or risks of inflation, you know, being too low.
The U.S. with this incredible tech innovation and inflation too high. Europe, they don't have the benefit of the tech innovation. They have a bit of an inflation problem.
This is, you know, discomforting in some sense, but also creates an incredibly attractive global opportunity set. It creates an incredible opportunity to generate active returns through harvesting opportunities across this opportunity set. It's been true the last few years.
It was not true for many of the years coming out of the global financial crisis. So yes, you describe a lot of risks, but those risks, of course, can be translated into opportunity if you have a sufficiently broad opportunity set. So I want to start transitioning to this point about the investment opportunity set.
You're thinking about the policymakers, you're coming out, they sort of try to take volatility away from the markets by adding stimulus, things of that sort. It does seem like Kevin Warsh, by trying not to provide any forward guidance, he's implicitly also trying to say there's no Warsh put to the market, which, you know, again, sort of is that volatility element. And about a year ago, I wrote a note entitled The Great Risk Transfer, meaning for a while, policymakers were taking risk off the hands of individuals, including investors, and I think now, for a variety of reasons, that risk is being put on investors, which is a challenge, but also, as you say, kind of creates opportunities.
And the first thing I want to kind of dive into more is going back to the AI kind of thesis. Now, AI, the investment aspect to it, energy demands, the build-out, the wealth effect creating through like the wealth being created in the stock market as opposed to consumption, labor market implications, so on and so forth. It's significant enough that we published a few weeks ago a piece we call The AI Economy, kind of laying out a whole framework to think about the economy.
And then from an asset allocation perspective, I kind of think of it's not a line item you allocate into a portfolio, but it's almost like AI is a macro factor that influences everything you have to think about for asset allocation, whether what the Fed does for rates, for credit spreads, for opportunities and equities. So my question for you on this is like on this first part, like when you think about AI, how are you thinking about it then? Is it an opportunity?
Is it something that every aspect of the portfolios that you guys look at are thinking like, well, how is AI impacting this? What are those tail risks, upside and downside that we have to sort of monitor? So it is almost like a cross-asset factor impacting everything.
Yeah, well, great. That was a great piece, by the way, on AI more broadly. A few points there.
One, it's leading to significant uncertainty. Our general thinking is that it could lead to a little bit of inflationary pressure over the short term, over the intermediate to longer term. This technology could prove to be quite disinflationary.
One of the reasons why we like valuations in the bond market at the moment, it is also leading to obviously significant uncertainty and disruption. So if you're buying equities in AI companies, well, it's fine. You buy 10 equities, seven of them go out of business, three of them go to the moon, you end up making lots of money.
If you're a fixed income allocator and you buy debt in 10 AI companies, gosh, if seven go under, you're in big trouble. But it only takes one or two problems on the credit side and it ended up being a bad investment decision. So yes, AI is an incredible opportunity for us as a firm and our clients, given the massive funding needs within this asset class.
But we don't want to own too much of it. You do not want to overweight a technological sector with so much uncertainty. But what's great is that the funding needs are so large relative to the market more broadly, where you can take very, very small exposure to at times investment grade type credit risk and generate incredibly attractive returns.
And you can structure those transactions at times where you don't have to wait five or 10 years to harness those higher returns. You can structure risk in a way where you have the ability to monetize those returns very, very early. So this is one of the most exciting active investment opportunities that I have seen in my career.
And it's not just tech related opportunities. It's energy related infrastructure as well, because you need to find a way, of course, to power all of these investments. So you need to have a defensive mindset.
You have to have appropriate humility that there's incredible uncertainty within this sector, but it is a massive source of investment return if you're sufficiently defensive, creative, and you leverage the collective assets that we run on behalf of clients all around the globe. Well, I'd like to dive a little more into those kind of opportunities, because I think for not the layperson, but the average investor, they're certainly aware, I would think, that there's been a massive amount of issuance by some of the big hyperscalers to finance this spending, some big names. You've seen a big supply of investment grade corporate bonds.
But that seems like it's maybe the tip of the spear of how this investment is being financed. And it's not just that. There's other types of credit, structured product, project financing, things of that sort.
And given the magnitude of numbers that are being talked about, another maybe trillion dollars next year of financing, where do you see some of those opportunities? What kind of things do you find most appealing? And also, where do you think maybe the innovation that you're involved in as a firm, there's opportunities there that would be from a fixed income portfolio, portfolio diversification.
These are some of the more interesting ways to get access to this story. It's not just buying stocks or buying corporate bonds. Well, great.
So let me start at the most simple place. And you mentioned this earlier, that governments have spent a lot of money in recent years. In the U.S., we're running big deficits.
Now you have these multi-trillion dollar investment needs from all of these technology firms, energy infrastructure oriented firms. And this is all very well advertised. So these numbers are large, and they're numbers that the market's quite aware of.
That's one of the reasons why yields are as high as they are. So when you just look at high quality bonds, even outside the technology sectors themselves, you can put together real high quality bond portfolios today with 6%, 7%, 8% type base case return. If you get creative and give up some liquidity, you take advantage of a global opportunity set, you can get those yields even higher.
And as we know in the high quality bond markets, if you have a five-year time horizon, you're highly likely to earn your yield. The correlation of starting yield to five-year return within the aggregate index, the high quality popular bond index here in this country is about 95%. So because of these funding needs, it's led to higher yields across the market more broadly.
So if you want to just keep it simple, defensive, very, very attractive starting yield. The highest we've seen in 15 plus years. Very attractive versus equities.
If you want to take advantage of high quality opportunities within the technology space, there are opportunities to go out there and lend to high quality credits like Aveda, like a Google, like a Broadcom, just to name a few of the solid investment grade type in diversified technology firms. Their debt trades at fairly tight levels. But if you help them fund a data center investment or an investment tied to technological infrastructure where they guarantee that debt on your behalf, you can, if you get creative on certain transactions, end up earning a significant premium to that investment grade company's typical debt.
In fact, you could get to a point where you could end up with returns that you would have to go all the way down into the single B type rated area of the traditional corporate credit market to be able to obtain. So putting simple yields on that, you can get, again, high single digit type returns with what we think would be a solid investment grade profile. The other area would be in the more riskier areas of the market where you can make infrastructure related investments, investments in companies that aren't as diversified or aren't as higher credit quality as the names or examples that I just mentioned and end up with equity like returns, low double digit type returns, which again, are risky.
You don't want to own too much of that in a high quality bond portfolio. But if you're an investor that's looking at their stock market valuations, realizing that if you're in the S&P 500, 10 or 15 years, you've generated 14 to 15% and question the ability to continue to earn those types of returns. You can shift from your equity portfolio into a cash flowing income producing asset and end up with a similar or we would argue an even greater return given starting relative valuations.
And then there's everything in between. Again, be selective but also open to portfolio flexibility and be able to unlock again the highest fixed income yields we've seen in a decade and a half, almost two decades now or move into some of the more return seeking areas of the market and end up with returns we think that are quite likely to outperform equities if you do your structuring right. Well, this leads into a question that I've been getting from some of our financial advisors recently and throughout the past year, which is kind of boils down to why should I invest in bonds anymore?
And so there's a little bit of hindsight bias. You mentioned the 14, 15% annual returns for equities for the past decades that people look at that like, why should I get that one, especially bond total returns because yields rose so much, not looking so great on a comparison basis. They may not be looking at where the starting point is today in terms of valuations and relative returns.
So I kind of get the question that we're trying to make the case to defend why bonds don't make a sense in your portfolio. There's a whole spectrum of bonds, as you just kind of highlighted, from the safest treasuries to more bespoke financing for infrastructure investments, things of that sort. And so I think you've already kind of made the case for why different points of fixed income make sense.
But maybe a different way to frame the question is like, all right, there's certainly a case for having fixed income, but how would you think about or how would you advise me to kind of pass on a question like, what's different about maybe the way you need to think about your fixed income portfolio and a multi-asset portfolio today versus five years ago versus 10 years ago? You know, taking into account like the macro environment, it's going to be different tail risks or different diversification, you know, and bonds diversification for equities might be different today than it was for the 2010s where it was a very good diversifier. So in a multi-asset portfolio context, like how do we need to think about bond allocations today differently, if at all, than it was five to 10 years ago?
Yeah, great question, Jason. And I should mention, I quoted estimates for equity returns over the last 10 to 15 years. High quality bond returns over the last 10 to 15 years have only been about 2%, 2.5% give or take.
You take away that, you know, well-behaved inflation rate we grew accustomed to of about two and you're left with close to nothing. So the reason why bonds are attractive today in an absolute and relative basis is they've done so poorly over the last several years. But as I mentioned earlier, in the high quality bond space, you're going to earn your yield if you have a intermediate term type time horizon.
And if we and others can make some good active investment decisions along the way, you can enhance that yield even further. And I'd like to think we've got a nice track record in doing that the last few years. So that's the bottom line.
I think the other point, though, to your question is that we think investors really benefit from expanding to a global opportunity set. As we all know, coming out of the global financial crisis, yields around the globe were very, very low. But in many parts of the world, like the UK, Europe, and Japan, they went outright negative.
You know, I sometimes get maybe accused of being a little biased being the CIO of a fixed income shop. But even back in, you know, the 20, 2000, you know, 21 type period, there was just no value in the market. And some of our flexible strategies, we had almost no interest rate exposure.
Today, not only in the United States is there value, but you can go to other countries in the world that have a much better debt and therefore credit picture than the United States, like in Australia, New Zealand. You have other countries around the world, like the UK, even Canada, Europe, some high quality areas of the emerging markets that have even higher yields than in the United States. And they have a much more constructive economic picture for bond returns going forward.
So as a diversifier, it makes sense, but also as a return enhancer to expand your thinking, you know, from more of a narrowly focused US opportunity set to a global opportunity set. And we don't think that that means taking higher risk. If you do that appropriately, we think, again, you could end up with higher yields and better downside protection.
So I think that's point number one. The second point we already covered, which is that although credit spreads are very, very tight, you do get compensated quite well in a series of potential special situations, as I'd call them, associated with the massive capital needs in certain sectors and segments of the market. So the bottom line, go from more narrow to more broad, stay up in quality, given how tight spreads are and given the macro uncertainty.
But also use that liquidity, use that flexibility to take advantage of a series of very, very exciting special situation type opportunities that are going to continue to roll through the active, even higher quality global fixed income area of the marketplace. On the global diversification piece or angle, do you see currently the performance of fixed income across different regions being a little bit more idiosyncratic or less correlated in such that if you have a global fixed income portfolio, you actually get better diversification today than you would have 10 years ago? And I tie this back to the secular themes of rupture, of fragmentation, that different regions might have different central bank policies, they can have different fiscal dynamics, and that certainly equity markets for a while were highly correlated.
Perhaps as the world fragments, that actually creates more diversification because they move for different reasons. Are you seeing the same thing on fixed income, that actually the diversification, the lower correlations today versus it would have been again like 5 or 10 years ago? Yeah, I should have mentioned correlations earlier and I'll start high level then I'll answer your specific question.
While inflation continues to be the primary risk in markets and we had a period earlier this year where inflation was coming down and bond stock correlations were better behaved, meaning on days where stocks were going down, bonds were tending to go up and that leads to of course lower overall volatility for client portfolios. With inflation now being the primary risk in markets and a lot of that again or most of that's because of the Middle Eastern situation, bonds and stocks are going to likely move in the same direction for the time being. We think when we get some clarity on the Middle Eastern situation, we're going to be back with a better correlation in terms of reducing overall portfolio volatility.
We absolutely believe that global diversification in bonds will improve overall portfolio volatility or reduce volatility. We have much less synchronized cycles than we've had in the past. We have less global central bank involvement in markets.
If you just look at economies that are benefiting from AI versus those that aren't, they're making massive differences in terms of economic performance. Those that are benefiting, the United States, Korea, Taiwan as a few examples. Those that aren't benefiting, Europe, UK to a degree, much more stagnant growth.
This is creating massive opportunity to take advantage of that global opportunity set and generate higher yields, higher returns but at the same time reduce portfolio volatility. That's very rare. Typically to get diversification, to get lower volatility, you've got to give up some return given that this market set up is so exciting that you can now expand to a flexible mandate, a global mandate, improve return and lower volatility.
So again, we think we're in this type of environment over the next several years. Our time is almost up and there's a lot more questions I'd like to ask but maybe just one final question and it kind of falls from what you mentioned. You're talking to investors around the world.
You're talking to institutional investors, wealth managers, asset allocators, individual investors. When you kind of relay these opportunities, kind of what you're excited about, knowing what these type of different investors were doing 5, 10, 15 years ago, where do you see people thinking about their fixed income allocation evolving? Are they more receptive to this global allocation?
Where maybe is the consensus when you talk to these different types of investors? Where are they shifting? versus maybe still a little bit need a little more of a convincing on your part to get them to kind of embrace this particular view? Sure.
So the higher stocks go all else equal, the lower their likely returns are going to be. The higher yields go in fixed income, the higher the forward returns are likely to be. And as we mentioned earlier, we've had 10 or 15 years where stocks have gone up well above their historical averages.
And bonds or yields have gone, according to yields, much higher than their historical average. So within fixed income, it's not that complicated. And I always joke, I'm glad I don't have to do all this fancy, you know, growth, you know, tech investing or VC investing, where you got to figure out what someone's going to pay for something not generating cash flow five years forward.
We don't have that type of complexity. You know, we earn a yield, and if you are patient enough, that's what you're going to receive ultimately. And that's exciting, because if we were having this conversation five, six years ago, you know, we would have been talking about diversified global high quality bond portfolios yielding 3%, 3.5%, maybe 4%.
Today we can have this conversation and yields now have more than doubled. So we're talking today, conservatively, even not giving much credit to active alpha creation of yields, as we mentioned earlier in the call of 6%, 7%, even 8%. You add some alpha to that now, and you're getting up into close to double digit type levels within flexible fixed income.
Quite attractive on an absolute basis, quite attractive than, you know, than even the level of cash yields today. And when you look at where equity starting valuations are, and you look at what historical or what forward returns have been with these valuations as a starting point, bond yields look super duper attractive. In fact, almost as attractive as they've ever been versus equities.
So no guarantees that history is going to repeat itself. But you know, over a five year period, the value proposition for fixed income is quite attractive. So yes, we started the call talking about all the risks, all the things that could go wrong.
There's a lot that could go right, even without needing to predict what central banks do or what inflation is going to do the next several quarters. If you sit back, be patient, earn your high yield, investors are going to be much more happy with fixed income returns most likely than they have over, you know, much of the last, you know, decade or so. Well, more risks, but also, as you say, more returns going forward.
Very generous with your time. Very productive conversation today, Dan. We will definitely look forward to having you back on How Should I Be positioned at some point here with Jason.
But thank you both again for dropping by today, spending some time with our listeners and their clients. Great to be with you both. Thanks, Dan and Jason.
Really appreciate the relationship with UBS. Please follow up with any questions across the system. Really, really appreciate the partnership and look forward to seeing everyone in person at some point later on in the year.
You look forward to having you back, Dan. Appreciate it. Thank you, guys.
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