Constructing a Portfolio for a More Uncertain Environment

The investment outlook for early 2025 is characterized by significant volatility, influenced by factors such as new governmental policies, earnings reports, and foreign exchange impacts. In response, portfolios have been adjusted towards a balanced approach, reducing cyclical risks while maintaining a focus on quality businesses. A key perspective maintained since 2021 is the expectation of persistent inflation, driven by factors such as employment trends, commodity prices, and deglobalization, likely resulting in prolonged higher interest rates.

Value stocks have outperformed growth stocks at the start of 2025, continuing a trend from the latter half of 2024. Historical parallels from the 1940s and 1970s suggest that in high inflation periods, value stocks tend to outperform growth stocks. However, the volatility associated with artificial intelligence investments necessitates a balanced approach to U.S. equities.

Sector-specific opportunities are identified in value investing, particularly in financials and health care. Although the financial sector shows momentum due to potential deregulation and increased investment banking, the focus remains on sustainable business models, like those in insurance. Health care presents significant opportunities due to its recent underperformance and historical patterns of outperformance during Republican administrations, suggesting that certain stocks are undervalued relative to their intrinsic worth.

Overall, while the U.S. market ended 2024 with high valuations, the Opportunistic Value approach allows for portfolio construction based on identifying and capitalizing on discrepancies between stock movements and their fundamental value. This strategy emphasizes selective investment in sectors and companies where intrinsic value is not fully recognized by the market.