Manulife John Hancock Investments co-chief investment strategist Matt Miskin advises investors to reduce concentration in the artificial intelligence trade by shifting portfolios toward healthcare and defensive equities. Speaking on Yahoo Finance's FA Corner, Miskin noted that broad market indices have become heavily weighted toward technology, making it difficult to avoid AI exposure even in value strategies. He stated that emerging markets are now 50% in tech and US large-cap value is 20% tech, prompting the firm to move down in market capitalization and seek relative strength in other sectors.
Miskin identified healthcare as a key area of interest, citing defensive positioning and the expectation that earnings will beat estimates. He described the current market reversal as an opportunity to observe how assets behave when AI sentiment cools, noting that bonds and defensive stocks are receiving a bid. For investors remaining in the tech sector, Miskin emphasized the importance of distinguishing between reported earnings and actual cash flow. He pointed out that approximately 50% of S&P 500 earnings growth is driven by AI capital expenditure, a metric he characterized as less reliable than cash flow. He warned that large technology companies are increasingly issuing debt and equity to finance spending, a move that dilutes current shareholders compared to the historical practice of using buybacks.
The strategist also addressed credit conditions, highlighting that Triple C spreads have widened to over 1000 basis points. He noted that the lowest credit quality companies now face borrowing costs of 15%, a level he described as difficult for businesses to overcome with their return on invested capital. Consequently, Manulife John Hancock Investments is trimming small caps and high-yield assets in favor of higher quality holdings. Miskin suggested that bonds offer a viable alternative for investors seeking income or looking to take profits off the table, describing them as currently unpopular but attractive.
Looking toward the broader economic cycle, Miskin compared the current environment to 2018, when fiscal stimulus led to a peak in bond yields in October. He observed that while the Federal Reserve may adopt a hawkish stance now, it cut rates in 2019 following the 2017 tax cuts. He projected that geopolitical risks and fiscal concerns may diminish by 2027, potentially allowing for further disinflation. Miskin noted that the 10-year Treasury yield was 3.96% prior to the conflict in Iran in February, suggesting significant potential for bond price appreciation if yields return to that level. He concluded that energy inflation is expected to diminish by March of next year, which could provide a relief valve if the Federal Reserve eases policy.