Scott Chan
speaker
125 appearances
1 recordings
1 series
first heard Mar 2025
last heard Mar 2025
Scott Chan’s voice in public audio — every appearance, attributed to the second.
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Appearances
If you think about the year before that, people, and the year before that, I mean, for several years, people thought we were going to head into recession. Why? Because interest rates moved up over 500 basis points and there has been a lot of historical precedent around when rates have gone up so much, yet the market went up, you know, again, over 20% for the S&P. If you think about globally,
The U.S. also is likely considered probably the most attractive, you know, in terms of economic growth in comparison to, for example, China or for some of the other, Europe, certainly. And so a lot of my peers globally, they want to continue to invest in the U.S. And so the setup, the expectations, I think, for the U.S. market and global equity as being, the U.S.
market being a very large part of that, you know, call it 60% or so at this point, is pretty high. And the economy is robust. But the problem now that you're bumping into is after several years of really robust returns, you've got high valuations. Even if you consider some of these large cap tech names have higher profits and they're growing faster, even considering that now,
The valuations are on the higher end. We've had a decade of outperformance, particularly in the S&P, and we're starting to see some concentration of stock performance, of course, at the top. That's worrisome. So you can really never time the tops and bottoms of cycles, but I do think that it's becoming more likely that we're going to see underperformance here.
Number two, I think there are many areas that with a higher probability, we're gonna see them outperform the equity markets. And I don't think we've been able to say that over the last two or three years, right? And these areas are gonna most likely provide low risk and diversify the portfolio of CalSTRS. And so what are these areas?
Infrastructure and energy transition, equity on the private side. I think that's gonna be robust and remain robust. There's certain areas of private credit that I think are going to generate more returns at a lower risk profile. And structurally, I think these premiums are going to be higher because there's going to continue to exist a supply and demand gap, the financing of that.
So these are areas like asset backed, infrastructure debt, energy transition debt. I think those are areas. And if you think about the opposite of the S&P and the stock markets, real estate has been down two years in a row, and it's been down very, very significantly. They were the first to react to this pricing adjustment of the rise in interest rates over 5%.
Every time you've seen a few significant years of decline going forward, it's led to outperformance in the real estate segment. So it's likely too early for us to call this
inflection point like here's the bottom but i do think that um you can start picking your shots we're seeing more opportunities and this is likely isn't one year from now is it two years from now um we'll start to see an inflection point um where we'll go from pockets of opportunities to real estate to the sector uh making a comeback those are some areas that that i think are very interesting the third thing and maybe also from a contrarian mindset
is that at a certain point, and it could be as early as this year, liquidity. Liquidity is going to be more valuable than gold. There's a lot of uncertainty and risk that's not priced in securities. The way that that tends to work is that it doesn't get priced in until there's an event, right? Something actually happens.
But we know that there are many triggers of potential events from the shocking events 100 plus executive orders that we've seen to, you know, the potential tariffs or immigration, our fiscal deficit, geopolitics. I mean, there's so many different triggers out there.
And I think because of this uncertainty, bottom line is, I think, you know, at a certain point, maybe it's this year, most likely, we'll see, you know, the stock market down.
What we're doing is number one, we're bringing what we call our diversifying assets back to target. That's primarily fixed income, but also includes hedge funds and cash. We had been underweight that, you know, as we were riding the tailwinds of a strong market, we're bringing that back to target from an underweight position.
And number two, we're really ensuring that we have the firepower and liquidity to invest in a crisis or a market downturn. where I think that's where asset allocators really can differentiate themselves, providing liquidity during extreme market sell-offs. And so we've done a lot of work over the last three years in enhancing our liquidity tools to be able to get into that position.
It's more on the supply of liquidity where we've identified, you know, if we went into a crisis, what sources of liquidity would we be drawing on, where we should invest in it, that changes fairly dynamically because at the point in time, you know, is it that the markets are down 40% and, you know, it's time to, you know, to get back into the, you know, the global equity markets?
Are we seeing pockets of opportunity in the private markets? Right now, I could tell you what we're interested in, and maybe that would remain the same in a market solid, but maybe it would be different. And so a lot of the preparation revolves just around the liquidity tools we'll be using at the time.
And then we're going to be meeting with the teams to say, is it still these areas or are there different areas that we should be emphasizing? Because the market prices will be changing very dynamically along the way down.
Fixed income would have a lot of liquidity, for example. That includes our hedge fund book, which we call Risk-Making Strategies. if the market downdraft comes, taking profits from those two areas is going to be a great thing for us to do at that time. Cash was also part of that diversifying set of asset base that we have, the diversifying portfolio.
In other words, the other element is that we can draw down on our balance sheet. And so are there ways that we want to create leverage during that time to be able to provide liquidity, which we would believe would be sort of short-term in nature over a cycle. How would we want to draw upon those sources, particularly in times of great discounts and dislocations in the market?
Every crisis and recession is different. We had a contest internally to counsel. We got all our divisions together and we're like, we want everyone to present their best ideas and we're going to have some fun with this and it's going to be like a contest and we'll rate it and we'll get the best idea.
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