2025 Equity Face-Off Roundtable

Bryant VanCronkhite: I am Bryant VanCronkhite, senior portfolio manager and co-head of the Special Global Equity team here at Allspring. This is a very special edition of SpringTalk. Today, joining me is Alison Shimada, the senior portfolio manager and head of the Total Emerging Markets Equity team, and Mike Smith, the head and senior portfolio manager of the Growth Equity team. Welcome, guys.

Mike Smith: Thanks, Bryant.

Alison Shimada: Thanks for having me, Bryant.

Bryant: Well, today, we're going to cover a lot of topics. We're going to talk about what's happening in the economy, what's happening in the markets, and our projections as well. But I first wanted to step back and level set, right? There is a tremendous amount of uncertainty, fear; the VIX index is skyrocketing, and people are just nervous. But we've been doing this for a long time—collectively, a very long time. And we've seen the financial crisis, the dot-com bust, the long-term capital management crisis. How would you compare and contrast, Mike, the differences between those events and what's happening right now as it relates to the tariffs, the geopolitical uncertainty, and the economic uncertainty?

Mike: Yeah, I think uncertainty is the key word, right? So, we're still trying to wait for the smoke to clear and figure out exactly what this is. And as you and I have been talking about, I think the what questions are more important than the when questions right now. And so, for me, there are sort of bookends of scenarios, right? 2010, 2011, 2015, 2018—those are years that you and I and Alison remember really well. Most people have forgotten those. Those are sort of the mini growth scares. 15%-ish drawdown in the market the last two to three months. If that's what we're dealing with here, we're well on our way to putting this behind us. We've also lived through some tougher times—2008, 1999, 2000. Those types of scenarios, you generally see a half-off sale in your portfolio. And that can take six months, can take a year, can take a little longer. And I really think it's too early to say what we're dealing with. They have one thing in common: they end. Those events are all in the rearview mirror. Our clients have all gone on to compound their portfolios and earn good returns, and I think that's the lesson of each of those events. And so, no matter what, we have that to look forward to. Today, we're stuck trying to figure out what the heck's going on, just like everybody else.

Bryant: Yeah. Alison, how about you? In the emerging markets arena, how is this particular event—it's a very geopolitical, very global event with tariffs right now—how does it compare and contrast with the previous events, and what does it mean for your corner of the investment market?

Alison: It reminds me a little bit of the Asian crisis, which occurred in 1997. And it was predicated on the move that Thailand made to basically devalue their currency. And it really had a lot of implications for other countries in Asia surrounding them. And it was kind of a unilateral move that they made. And it affected just like the U.S. made a move here, this time with tariffs. And it really did impact—had a lot of the collateral damage. And it took a number of years, but they learned from it. I'd say that was a similarity, and a difference is that it wasn't a situation whereby a country turned on its trade partners, which is quite unique this time. We had very longstanding agreements and relationships in place that are seemingly unraveled this time a bit or challenged, so I think that has been a very unique aspect of the tariff situation.

Bryant: That's a great point. But one thing that's not unique—and we think hopefully this time as Mike said—is that these things come to an end, right? The world rarely actually ends. And so, when I look back at those events, we work through them and a lot of times we work through them with the Fed (Federal Reserve) in the U.S., at least. And the Federal Reserve kind of steps in and does what they do. They make sure the plumbing continues to work. They re-inject capital into the economy, usually by cutting interest rates and through other mechanisms. And one of the fears right now is that as investors, we’re really relying a lot on the Fed to be there for us and maybe they can't be, right? The dual mandate of full employment and price stability can be put into question here, if prices keep going up, if inflation keeps coming in. Now, my personal view is that the worst-case scenario here is it creates an economic gap where demand drops, we enter that recession mode, and inflation stays a bit high. But, ultimately, output gaps have to be deflationary, and it might take a little bit more time and the Fed's going to be data dependent waiting for that, but eventually, the Fed will do what they do. They’ll re-inject capital; we’ll go through a very natural, normal rebasing of the economy; and we’ll reaccelerate are out of there. And I think that has big implications for where we put capital today, and we'll get to that. But where am I wrong? Where am I wrong on the idea of the Fed isn't going to ultimately be there to support us as investors?

Mike: I don't think you're wrong. I think it's a situation, for me, where I'm holding two opposing thoughts in my head at once. I agree with what you said. I also agree with what Alison said about that it's unprecedented for this type of tension to exist with our trading partners. And I think the one thing that's different about 2025 compared to other sort of growth scares or sell-offs we've been through is usually that starts somewhere else and then somebody in the government—Tim Geithner or Ben Bernanke or somebody—puts on their cape and flies in and saves the day. This crisis—sort of crisis, if you will—started with government policy and government action. So, who's going to save us from ourselves? I guess they could reverse some of the things they've done or lots of different things could happen, but it makes it unique. So, all of my experience, everything I've learned in my career aligns with what you said. However, I totally agree with Alison. There's some unprecedented aspect to this situation, too, that makes the analysis tricky.

Bryant: Sure. And one of those areas where we're seeing the market respond in pretty unique ways right now is the currency market, right? The global currency market is one of the largest, most liquid markets, which therefore might mean it's the most efficient market. And so, when I think of currencies, I think of EM (emerging markets). I think of how the currencies can impact the trading paths, the economic impact, and the markets in EM. And so, Alison, maybe educate all of us on what's happening with currencies right now and how is that impacting your views on the equity opportunity?

Alison: It’s playing out somewhat how we expected it to be over the past few years. We did expect and we really felt as a team that the U.S. dollar was somewhat overvalued, and we were waiting for that to reverse. We didn't know what the catalyst would be, but obviously now we know, right? So, it has helped emerging markets, to a certain extent. And I think that what it has done more than anything is to turn people's attention to an asset class that they had ignored for 13 years. So, I think it's a question of sentiment more than anything. I mean, the underlying economies have been operating with no systemic risk for that entire time. It's just that people didn't pay attention because the U.S. was so attractive and the dollar was so strong and as a reserve currency, etc., etc. So, I think it's just turning people's heads to being more inclusive of other asset classes like emerging markets. The U.S., I assume, will always be a strong economy, basically. But to offset that or to find some diversification through EM is what that signals, the dollar weakening signals. And I do think it has a ways to go, but as long as it doesn't happen overnight, countries can adjust. It's any sudden shocks that are the problem.

Bryant: I agree. Companies adjust, people adjust, consumers adjust, and we're going to all navigate through this. I think one of the things that we need to determine, at least in the U.S. right now, is what are some of the impacts this has—whether direct or indirect—on the various parties involved. And where I kind of focus our day-to-day job—where we all focus our day-to-day job—is on picking companies. And how do those stocks react? And we've been, in the U.S., very lucky to have corporate profits growing and growing and growing. Part of that is through innovation. Part of that's been through globalization, putting downward pressure on the cost to manufacture, the cost to provide services. Part of that has been tax policy has been moving down and corporate profits have been growing in the U.S. to the point where, as a percentage of GDP (gross domestic product), they’re at all-time highs. But I think I'm looking at companies now saying how sustainable is that, right? Are those going to come down as all these different pieces might be going the opposite direction? And then, what does that mean for the market multiples and what we pay for these equities? And so, I know for me and our team right now, we're focused on things like pricing power. Can this company raise prices when they need to or when they want to allow for margins to stay stable and maybe keep growing despite these headwinds? What are some of the other ramifications that you're seeing when it relates to maybe the faster-growing companies and your corner of the market that could be just direct or indirect side effects that you're thinking about right now?

Mike: You hit on a few things there that I think are important. I'll start with the price increases. Remember the word surcharge? We've seen that a few times in our careers before. Surcharge for the win in 2025. I think that's something to keep an eye out for and I think you're going to see companies hide behind the news of the day to push through a little extra price. And that'll certainly help earnings and help margins. So, that's one thing. I think the second, you and I and Alison all manage a team and work with a group of analysts who are very good at what they do. It's very hard to analyze revenue in times like this. It is easier to analyze costs and margins and think about different business models and different businesses and try to understand different scenarios and how those could impact the margins. And I think you're right. We come into this period of time with really high margins overall and trying to be active and pick the businesses who have more flexibility in their business models and more agility, I think puts us in a really good position. And I think these types of events can be really good for active management. I think this is a period of time when our skills are really important and our ability to shine is firmly on the table. So, I'm excited about that. So, I think those are the two main things.

Bryant: Yeah, I fully agree with that last point on active management. There's probably no portion of the equity markets where active management is more critical in my mind than emerging markets because you're dealing with a lot of nuance and a lot of exterior forces that drive what happens in those markets. And Alison, as we think about the side effects here, specific to companies in emerging markets countries, how are you thinking about it? What are you focused on with your team right now, and what are some of the side effects people should be thinking about?

Alison: I think we're focused on the factors that lead one to have a quality portfolio because I think this is not going to be an easy time. For us in emerging markets right now, you see quite a large rangebound kind of market, a lot of volatility but opportunities behind that. So, you really do need to rely upon stock selection and we're looking at shareholder return. So, we're always looking for things that look abnormally high in terms of cash dividends or companies who are doing share buybacks regularly and their track record of execution. It’s a terrific business model that we want to own, regardless of the type of short-term economy you're in. And it's bringing up opportunities based on those factors that we haven't seen in a while. So, abnormally high shareholder returns plus good capital appreciation opportunity. So, the combination of that package is what we're looking for. But, ultimately, I think you need to construct, I think, the kind of portfolio that does best lend itself to quality right now, quality growth.

Bryant: That makes a lot of sense. Maybe let's stick with EM right now and maybe just narrow in on the opportunities. It sounds like the quality basket might be on sale if you have a long-term view. Share buybacks, high dividends, all return of capital sounds appealing right now. Maybe narrow in a little bit. Are you finding opportunities in any certain countries or regions right now—or sectors even—that are sort of being thrown aside that maybe shouldn't be?

Alison: One area, a geographical area, is Latin America. And Latin America has suffered less from the near-term shocks of the tariffs than other regions, such as Asia. And a country like Brazil, which has a very large domestic population, has agricultural commodities. They do have expert industries, such as aerospace as well. So, they have a lot of different industries, fintech. So, it's a very wide economy and it's a growing economy. Plus, they have a very nice shareholder return that's almost always paid. And the valuations are quite low. So, I think Brazil is quite promising. And our analyst Sergio Torres has just been to Brazil to validate that. I also think that India is another area that is very interesting, even though people's excuse is usually that it's very expensive, but once again, they have a very big infrastructure agenda in terms of building out energy infrastructure, AI opportunities. They have a lot of startup companies there. So, it's quite interesting to me and also to the emerging consumer, local investor, that's trying to save money and invest in the market. So, I think those two countries are interesting. And lastly, sort of a pure investment standpoint, I think China, from a domestic cyclical recovery standpoint, is very interesting. There are opportunities. One must, of course, tread carefully and probably stay, for the meantime, away from export-driven companies. But we do see opportunities with terrific valuation and growth opportunities with the potential to appreciate by 20%, 30%, or 40%. So, it could be one of the better-performing countries.

Bryant: Yeah, I think treading carefully is a smart theme across every corner of the markets right now. And one of the things that we get to do all the time is talk to company management teams. Our teams are on the phone every day with CEOs and CFOs across the globe, and many of them, to Alison's point, I think, are saying that maybe Latin America is the easiest place, the lowest-risk place to think about allocating capital right now as you think about an American onshoring effort or near-shoring effort. What are you hearing, Mike, from your CEOs and CFOs right now? I'm sure they're saying we don't know what's going to happen, but here's what we're thinking. What are you looking for? What are you hearing right now? And then, we'll maybe dive into opportunities in the U.S. after that.

Mike: I'll answer them separately in reverse order. So, looking for—it’s something you and I've talked about a lot over the years—always looking for companies that can go on offense when their competition has to be on defense. And I think having the quality bias that we all share in common, like Alison said, draws us to those types of companies. And so, I think one thing to look for is who isn't going to let whatever this crisis is go to waste and where can they go on offense and do something really smart at an opportunistic time? It’s too early to say we're seeing that but we’re definitely looking for it. In terms of what we're hearing, it's early days and I think we're hearing what everybody would expect. Am I going to meet my full-year hiring plan in Q2? Probably not. I'm going to slow down. Am I going to spend my ad budget in Q2? I may keep a little bit in my back pocket, see how the rest of the year shakes out. That's normal corporate behavior. I think it adds to a little bit of the fog of war that we're all dealing with. I think it'll be temporary. So, that's one thing we're looking for, or hearing, I should say. But we are hearing some surprising things, actually. I was meeting with my consumer analyst yesterday. You've probably seen it in your inbox, and I have, too: Hey, buy now before the tariffs hit, right? So, there is a little bit of a short-term pop, I think, to the consumer economy that maybe is a little nuanced and requires some second-order thinking. But I think there are some things like that that we're going to see this spring that may kind of offset some of the negative sentiment. And, really, when you think about it, the consumer is coming into this year in pretty good shape. The credit situation's not bad. House prices are up. That's the source of wealth for most consumers. There are 270 million adults in the United States. Over half of them are baby boomers or millennials. And those two demographic cohorts represent over 60% of the consumer economy, and the consumer economy is over 70% of the overall economy. So, you multiply those numbers together and there is sort of this ballast to the economy that I think keeps us from driving straight over the cliff. And I think you're going to hear some good news to offset the worries as we get into earnings and understand a little bit better how companies are doing.

Bryant: Yeah, those are all great points. And I want to go back to one point you made, which is owning companies that can play offense while the world around us is playing defense. It's one of the themes that our team likes to think about, but we think about it through a very narrow path of how does a company use their balance sheet flexibility to drive their own outcomes? And we talk all the time, and we're going to talk all the time this earnings season with companies about all the things they don't control: GDP, tariffs, interest rates, inflation, deflation. Our team's view is that the only thing a company controls is how they use their capital. How are you going to use your balance sheet for acquisitions, vertical integration, organic investments, buying back stock and dividends, which is a huge part of Alison's process. Those are their choices. We think about companies and we're looking for companies right now that are going to invest through the cycle, not around the cycle, because they have a balance sheet to do that. And, so, we're thinking there. We're focused there. But it sounds like we're looking for a lot of the same things this quarter when we talk to companies. One of the questions I always get—and I think you do, too—is should I be in growth or value in the U.S.? Everyone knows they should already own some emerging markets, but they don't know where to put capital value versus growth in the U.S. I came into this year saying it's value’s turn. I thought growth valuations were too high and, frankly, thought that as go the Mag 7, there goes growth. And I thought those fundamentals there are going to converge and it's proven out to be true. Now, I'm retesting my thesis. I have some reasons why I could be wrong for value to continue to win. But I want to hear from you. What's the story for why growth is appealing right now as a category within the U.S. markets?

Mike: Well, first of all, and you know this from our past conversations—I don't want to disappoint anybody that came for the face-off—growth and value is a perfectly good solution. And I think diversification right now, in fact, is really important. But obviously, I have an ax to grind and a pretty strong view. Look, I think because of demographics, because of the amount of debt that the government has, because of a lot of factors irrespective of what happens with the trade issues, for the rest of our careers, I believe we're stuck in a pretty low growth environment. And it turns out when GDP is low, like between 0% and 2%, growth stocks outperform. That's what history tells us. I think the reason for that is scarcity creates opportunity in value. The fewer companies there are that are able to grow, the more those companies are worth. And so, in my opinion, we're stuck in a regime for the next 20, 30 years where growth has an advantage because of that scarcity. Obviously, there are cycles in between that secular trend, and we came into 2025 with a very short list of growth stocks that were trading at very high prices. That's actually started to unwind. And I think we've all talked about winning on the other side of concentration and what happens when there's a broader participation across the market. And I think for investors, that may be the more important question. Is there opportunity down cap in mid caps and small caps and SMID caps? What sectors do I want to be invested in? I think that may have a more profound impact on outcomes over the next 1, 2, 3, 5 years than the growth-versus-value debate. Those are my thoughts.

Bryant: I mean, I totally agree with you. I think when there's a scarcity of growth in the market, you go buy the most visible growth companies that are out there. They're more defensive, and I think you're absolutely right. But maybe the most shocking comment I can make right now on this face-off is that I'm more optimistic on growth in the economy than the growth guy is right now and that scares me a bit. But the reason why is I think these things go through cycles. And like I said, we're going to have an output gap here through all of this. But that ultimately rebases, I think, in a healthier way for the economy in the U.S. and probably globally to reaccelerate off of that. So, we're going to probably have that growth scare, which might favor growth in the near term. I also think that one reason growth could work as a style versus value is that these big, fast-growing companies might pull back on their capex (capital expenditure), which ultimately boosts their free cash flow, which reduces uncertainty for future returns, which could support the growth equities. But I think that maybe has a period in which value will then reaccelerate again as the economy reaccelerates. So, it's going to be fascinating to watch it play out, and I'm excited to see it. But I think to your point, I think diversification here is really smart because the range is really, really wide. Maybe, Alison, before we wrap up here, maybe just one more time, what are the nuances that people just need to fully understand right now within emerging markets, whether it's where within the spectrum of emerging markets we need to be thinking about investing or how to understand the risk/reward trade-off? What's your best advice right now for people who are saying, I'm underweight EM because I have been for 13 years, as it's been ignored and now is the time to go overweight, but I need to know how to do it specifically? What advice would you give?

Alison: So, I think that for investors who want to increase their allocation or come back to the asset class, I think the most important thing is not to think about when to get in and out of the asset class but how to stay in the asset class. And you can do that really by thinking about resiliency, managing not to the highest growth companies but also to look for active management and think about resilience of a framework. And I think that's very important because the misconception about EM is that you always go there when your home market isn't working. So, you're looking for very high growth, which doesn't really sustain itself. So, I think in and of itself, emerging markets is an interesting asset class with differentiated innovation and services and goods. And I think people need to shift their mindset a little bit to that and look for, I think, reasonable growth and, like the way we do it, shareholder returns don't hurt you, either. So, I think that some kind of reasonable growth kind of strategy is the way to stay in it.

Bryant: Yeah. And I'd be remiss to not take a moment to talk about developed market ex-U.S. The international market actually is outperforming the U.S. market right now and I think for good reason. The idea of MAGA in the U.S.—Make America Great Again—actually is showing up as MEGA—Make Europe Great Again. And it's allowing a combination of countries that have been somewhat disorganized—I don't want to say dysfunctional but disorganized—all of a sudden to sort of get together around a common enemy. Enemy is probably too strong a word, but in a way to combat the issues around them, they need to work together and it's driving them out of fiscal austerity. We're seeing more spending out of Germany. We're seeing more coordination, I think, maybe around how they neutralize the debt situation. These are really powerful economic drivers that I think support a very strong case for investment in what are very low-priced stocks throughout Europe and other countries. And so, I'm actually really excited about the ex-U.S. market as well. And I know we've been heavy on EM and U.S. today, but that's a good place to focus right now and an opportunity to think about your allocation, what you're trying to earn and do with your non-U.S. exposure. A final question maybe for you and me, Mike: large cap, mid cap, small cap. I have all three children in my family running all three. You do, too. How are you thinking about helping investors understand where to be right now within the market-cap spectrum?

Mike: Yeah. Look, I think every event like this gives you an opportunity to stick to your long-term plan but also be tactical. And I get asked all the time, what are the rebalancing opportunities? Where can I put more capital to work? And the reality is when you look down cap, the buy signals are already there. The multiples are already approaching attractive levels—in some cases, trough levels. If you look at small-cap stocks, there's a fundamental catalyst. The relative earnings growth is actually catching up. And we'll see. There may be some adjustments to those estimates as the year goes on. But I think the fundamental differences that drove the real narrow market in 2023 and 2024 are actually starting to unwind. And that seems likely to continue. So, if you have attractive valuation and improving fundamentals and you just need a catalyst, which I think is the smoke clearing and us making sure we're dealing with realistic forecasts, I'm shifting a little bit of capital down cap. I think there's opportunity there. I thought MAGA stood for Make Active Management Great Again.

Bryant: It always has been great.

Mike: And I think that plays on the same theme, right? I think the market is broadening out. It doesn't happen linearly every week. But as that continues, I think there's alpha opportunities away from the most crowded stocks and the most popular stocks in the index.

Bryant: Yeah, I fully agree. Moving down cap right now seems appealing. I'm not all in yet with my capital to move down cap. I think I'm looking for credit spreads to maybe widen a little more, which indicates to me that risk is more fully priced in. But you're absolutely right. You can't understate the importance of fundamentals converging. Small-cap equities had a lower growth rate of earnings per share than large caps for a long time and, thus, that dispersion in multiples made a lot of sense. But we're starting to see that potentially inflect the opposite direction, if that plays out. Small caps look really attractive. So, I agree with you. It's time to begin to look down cap, but I'm not quite there to a point where I would say go all in on small caps. So, mid caps are a nice transition, but equities look attractive pretty much everywhere.

Mike: I think you're right. You’ve got to take the recession risk off the table and the credit risk away. On the flip side, the further down cap you go, the higher the domestic geographic mix tends to be in those businesses. So, you do kind of sidestep some of the trade talks. So, there's good and bad there. But I totally agree. The catalyst, I think, is the all-clear signal on the economy.

Bryant: Yeah. Well, thank you, Alison. Thank you, Mike, for joining me. This was a lot of fun. This is one of the best things that we do—favorite things that I do. Talk to smart people about investing. I'm glad you all could join us for this really special SpringTalk where we had a chance to face off with emerging markets, growth equities, and value equities. Thank you for joining, and we'll see you next time.