Supriya Menon, head of multi-asset strategy at Wellington Management, discusses the recent shake-up to global equities markets following the most recent release of Chinese-based tech firm, DeepSeek’s open-sourced AI model. The release ignited a major sell-off in shares across some of the top US tech companies as DeepSeek claims its models were developed at a fraction of the cost of rival US industry-leading models like OpenAI’s ChatGPT or Meta’s Llama—throwing up major questions about the tech spends on artificial intelligence.
Full Interview
Jo Gallagher Welcome to Trader TV This Week, your insight into how trading desks can prepare for the week ahead. I’m Jo Gallagher. Today I’m joined by Supriya Menon at Wellington Management to discuss the main topics and events leading this week. Supriya, welcome to the show.
Supriya Menon Thank you.
Jo Gallagher We saw the impact that DeepSeek and the AI frenzy had on markets last week. Is this just a short-term dislocation or does this have the potential to create a fundamental shift across the tech industry and to its valuations?
Supriya Menon So we are long of equities and our multi-asset portfolios. But I definitely say that the recent news has the potential to cause some short-term dislocation and can challenge valuations. Now in the mega-cap specifically, valuations are relatively full, but we also know that earnings have been really strong. There are legitimate questions being asked about whether all of the aggressive CapEx spend that we’ve seen coming through from some of the large platforms and others will be rewarded and whether AI will become more commoditized through time. On the other hand, we’ve also had recent announcements by Meta and other companies that they are ramping up CapEx spend. Meta, for example, announced 2 to 3 times what was expected for CapEx spend in 2025. So we assume that the AI race isn’t over and signs of competitors catching up can push some of these companies to work harder on innovation and that’s a good thing. For the market, the other thing that’s been important is technicals and positioning. On the one hand, S&P liquidity has actually been at healthy levels, but we also came into the last couple of weeks knowing that positioning in equities has been relatively stretched. For example, hedge fund positioning, when we look at gross exposure, is at relatively high levels when we compare it to the last five or so years. And there was also a lot of crowding into just a few names. Looking at things like Skew, which shows where the investors are hedging their portfolios or not had shown demand for downside protection declining recently. So keeping all of this in mind, we’d still remain positive on equities, but what we’d expect is a bit of broadening in the market. That within the US sectors and companies outside the very largest companies start to catch up in terms of their earnings growth and other regions outside of the U.S. also see a bit of an advance over the next few months. So this would be a healthy development and we’d recommend that investors maintain allocations to diversifying assets and regions with less mega-cap tech concentration.
Jo Gallagher And so could this disruption have the potential to benefit European and global markets?
Supriya Menon Yes, I would expect that this would be positive for Europe, where the rubber band has been stretched pretty tight. So relative valuations to the US, even adjusted for sectors, are at close to 30 year lows. When we look at positioning, it had showed a fair amount of capitulation. So very low positioning in European equities. But what we notice is some surveys for example, the Merrill Lynch fund manager survey is one that we follow, it showed a historically outsized shift in positioning into European equities away from the US. And in fact, we started seeing the European region outperform over the past month or so. On the fundamental side in Europe, developments that we’re watching include German elections, which are upcoming soon, whether we get a ramp up in defense spending as well as where the companies start to increase their investment spend. So a positive note on that. We saw long-term corporate borrowing move higher in the recent ECB bank lending survey, which is a sign of improving confidence. So I definitely assume that we see some broadening out into other regions beyond the US and Europe comes to mind.
Jo Gallagher So we have the AI story, we have Trump’s unpredictable policy changes and we also have sticky inflation–these are just some of the examples of headline risks from this year, and we’re only just going into February. How do you go about measuring volatility, and managing your reaction to the volatility, and has that changed over the last two years?
Supriya Menon Absolutely. Quite a lot has changed over the last two years. Now, the regime that we’re in, we believe, is one that’s characterized by structurally higher macro-policy uncertainty, higher inflation and overall macroeconomic volatility, as well as more security level dispersion. Security selection, therefore, becomes more interesting. One of the areas I’d highlight especially pertinent for multi-asset portfolios is the increase in correlations between equities and defensive fixed income, so government bonds. Over the past couple of years, but really since 2022, we’ve seen that correlations flip into positive territory. And that’s really important for us because it means we can’t always rely on bonds to provide that buffer for equities and other risk assets. It also makes central bank’s job a little bit more difficult because we’d expect more policy divergences. We saw that last week with the Fed staying put, where they didn’t cut rates while the ECB did. Now we know that both central banks are along way off what they believe to be a neutral level of rates. So where rates are neither accommodated nor restrictive. But the ECB path to get there, is a clearer one. The Fed has less leeway because that economy is more robust and inflation is more sticky.
Jo Gallagher Given everything that we’ve discussed and considering the reactionary and volatile environment that we’re in right now, what is the one piece of advice that you would offer trading desks?
Supriya Menon So I agree with you that this year we’re operating in a much choppier environment with a high volume of potentially market moving headlines. Now, we know that markets have historically found it harder to price in the impact of policy shifts and geopolitics to the same extent as with other corporate fundamentals and economic fundamentals. In that sense, I would encourage investors to take a longer-term view, focus on the cycle and on an earnings and look at where they can find those good entry points into long term exposures at a reasonable price and basically avoid trying to trade the daily news cycle.
Jo Gallagher Thank you, Supriya, for your insight and of course, you for watching this have been treated TV This Week.
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