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How to invest in times of turmoil · On The Money

• 0:03
  Dave Baxter: Hello, and welcome back to the On the Money podcast. I'm Dave Baxter. I'm back on hosting duties today. And today, I'm joined by Peter Dalgliesh. He has a wealth of experience in the investment space, most recently in his former role as chief investment officer at Parmenion.
• 0:20
  So, Peter, thank you very much for joining me today.
• 0:23
  Peter Dalgliesh: Thank you for having me.
• 0:24
  Dave Baxter: So, of course, as discussed, we're tackling a pretty weighty subject this week. I wanna talk about investing in times of turmoil. So that's nothing to do with, for example, the latest AI related sell off. It's about the very serious issue of mounting geopolitical tensions we've seen in recent years. Of course, so far this year, just a few weeks since 2026, we've seen more ramping up.
• 0:49
  To give a few examples, US intervention in Venezuela, fresh threats of trade tariffs, saber rattling of agreements, tensions between US and Iran, ongoing conflicts, of course, in places like The Ukraine and so on. This, of course, is a major humanitarian issue, a big issue in its own right. But like everything else, investors do also try to kind of navigate it. So we're gonna tackle that today. And before we started recording, you outlined some kind of interesting trends, I suppose, the direction of travel that you've seen in recent years.
• 1:27
  So I wondered if you could, to kick us off, touch on some of the most personal developments and what that means in terms of the kind of sectors and areas that are becoming increasingly relevant to investors.
• 1:41
  Peter Dalgliesh: Sure. I suppose that to a key notable callout that was made even in Davos, obviously, by the prime minister of Canada, Carney, was that we've gone from this environment of quite a rules based orderly, in inverted commas, environment, to disorderly. Now other commentators would go stronger than that and said that, actually, we have a US president that deliberately thrives and wants to instigate chaos. And that of how you interpret it from an investment point of view, that is a material shift, which I think investors are beginning to adjust to and consider in how they build portfolios. And, specifically, that relates to the other element, which is that what investors have fantastically written and enjoyed is a phenomenal success in investing in US assets collectively in the round.
• 2:42
  But at a point in time when those expectations now are pretty elevated and valuations, I think you could best describe them as full, means that the risk reward trade off is more finely balanced. Let's just put it politically correctly like that. And so what I think is is evident through '25, and we've begun to see it in the first five weeks of this year, this desire for diversification is beginning to manifest itself in performance, relative performance terms. So, obviously, ex US led returns in 2025. So far in 2026, that has continued to be the case.
• 3:26
  But that we're also beginning to see some meaningful shifts within the factors that have been driving that performance. And it's very noticeable in 2026 so far, and we're only five weeks in. But that actually you can wind it back and you can see that trend beginning to unfold through the fourth quarter of last year as well. So that I think is giving it a heads up that there's some longevity to this and that the need for a balanced approach from a geographical asset allocation point of view as well as from a factor style point of view is increasingly beginning to be incorporated by investors, whether from an institutional point of view or whether from a retail point of view. It's beginning to, I think, really to show and shine forth.
• 4:18
  So let's I mean, there's a
• 4:19
  Dave Baxter: lot to unpack there, but let's first touch on you mentioned the style points. Investment style has always had a quite a big bearing on returns. And I suppose in recent years, we've seen value has had this very powerful resurgence. But in this kind of era of heightened tension, heightened uncertainty, what kind of styles could potentially come to the fore? What might you want to, so to speak, keep in your back pocket as an investor?
• 4:48
  Yeah.
• 4:48
  Peter Dalgliesh: So I think the the other element of this shift to disorder is also an abundant call out deliberately and explicitly, I hasten that, of increased self dependency. So we can we can stick that under the umbrella of nationalism. Mhmm. That I think is beginning to really feed into the psyche of our politicians, and with it comes risks as well as opportunities. On the opportunity side of this, I think there are two elements which to your point, which is from a factor point of view, I think that, you know, to a large cap growth which has driven investor returns arguably since 2016 has been when it really kind of took off, which happened to coincide with Brexit, but I don't think Brexit was catalyst for that, has meant that the valuation disparity between large cap growth versus small caps, whether that's growth or whether it's value, but it's particularly clear in mid and small cap value, is giving investors that opportunity to say, well, actually, you know what?
• 6:06
  I can I can hit two birds with one stone here by leaning into the nationalism element, whereby mid and small caps tend to have a more domestic oriented bias to them, as well as being able to tap into lower valuations and therefore the risk of a drawdown is less? It's not removed, but it is marginally less.
• 6:30
  Dave Baxter: And how much, I suppose, kind of weight would you put behind small caps? Because that tends to be in a portfolio more of a satellite position. People, of course, have different opinions on what satellite means, but perhaps a single position wouldn't account for more than 5%. But, you know, would you view small caps as something that needs to be much more prominent in portfolios going forward or?
• 6:54
  Peter Dalgliesh: I think it comes back to that point around balance. No. You cannot take your eye off the ball in terms of ensuring that your risk of the portfolio in total is not suddenly being extended at a point in time when I could argue there are signs that we're moving more late cycle that would be arguably an irrational approach or certainly certainly that you want to be careful about. So I think having that keen eye on how much risk you are carrying within your portfolio remains as important as ever. Where I think there are some subtleties to all of this, which is important to bear in mind, there is a $130,000,000,000,000 invested in The US in capital markets as a whole.
• 7:44
  If we work on the basis of a sixty forty portfolio, 60% in equities, 40% in bonds or all term bonds alternatives, that implies roughly just shy of 80,000,000,000,000 into equities. At a point in time when most investors, but specifically The US investor, they have only 11% of their equity exposure overseas. If we worked on a global GDP pie chart, you would be concluding that they have got an excessive domestic bias. International investors similarly have a US over indexation is often how it's referred to and described. If half a percent of that $78,000,000,000,000 were to be reallocated, for example, The UK, and The UK has a market capitalization of just shy of 2 and a half trillion sterling, That translates into roughly 15% uplift in The UK market.
• 8:44
  That I think has a significant potential of a relatively small amount of capital reallocation that can provide some rerating opportunity as well as some ballast were we to go into an environment of risk off. So to your question, you know, are we in a position to realistically reallocate from large cap growth into small caps? The simple answer to that is no. But at the margin, were an allocation rebalance to be undertaken, that can still have a meaningful impact.
• 9:25
  Dave Baxter: Mhmm. So some kind of moderate allocation there. Let's talk about so I suppose it's interesting you're, you know, you're talking about the kind of dominance of US assets. We see that in the, as I like to call it, the humble global tracker, for example. What, I suppose, kind of regions are not very well covered by said trackers that perhaps we could see become more important in this, you know, era of growth tensions?
• 9:59
  Yeah. And I
• 9:59
  Peter Dalgliesh: think that's a really good question. Coming back to your earlier point around, you know, growth versus value, I was looking at the top five S and P 500 value index constituents, and they're actually made up of three of the MAG seven. Yeah. So if you're just simply buying a passive tracker, assuming that you're getting, I'm sorry, from a factor point of view, and you're gonna be migrating from growth into value, we might not necessarily achieve that enhanced diversification that you were looking for. So I do think that the landscape looking forward for all the reasons we've discussed is pointing towards the probability that difficult times of active managers is probably lessening, and the straightforward tailwinds of passive investing looks to me as if it's going to be facing a few more headwinds.
• 10:53
  Now within the world of passive though, especially with the likes of ETFs and the proliferation of new products, you can get a passive instrument covering virtually everything and anything. I would to encourage a degree of caution around that for a variety of reasons, which is firstly, it's around you wanna have a proven track record. So just simply jumping on into a vehicle that offers some particular exposure that you might want. If it doesn't have the particular size in terms of AUM, which typically speaking for an ETF has to be a 100,000,000 or above, otherwise, its proven life expectancy is finite. The second is a is a track record, and I I think at this point in time in the cycle where I foresee there is a real question mark in my head around the the world's assumption that the liquidity backdrop will remain supportive onwards and upwards forever in its perpetuity.
• 11:54
  I really feel less and less comfortable about that.
• 11:57
  Dave Baxter: So in practical terms, what does that mean?
• 12:00
  Peter Dalgliesh: So that means for for an ETF which has an obligation to reprice based on the underlying assets on a well, it's throughout the trading day. It means that actually that discernibility of the investment manager to select particular constituents and weightings within those to reflect the risk reward opportunity looking forward, that's that's removed. And so to that extent, I think the active manager has scope to be able to add alpha where the environments become a bit more challenging. Now it's not gonna be we know that it's not an even landscape. You know, the The US market is renowned for its relative efficiency, but you get into the likes of to The UK, specifically UK equity income, and there is, without meaning to name drop, there's a there is a track there.
• 12:54
  So the Vanguard Footsie UK equity income fund, for example, that has a very credible track record, has a yield of over 4%, and it is made up of a healthy basket of underlying in constituents of in excess of a 100 stocks. That I think provides you with the liquidity, the proven capability to deliver on what you're looking for, which is again coming back to some of our the points we were making, which is that I think looking forward, income is a factor which has fallen by the wayside, but actually looking forward could be an increasingly more important source of total return, which I think represents an opportunity for medium to long term investors.
• 13:37
  Dave Baxter: And I suppose we've already seen some of that kind of return to form of income funds, particularly last year. Lots of kind of financials, heavy portfolios, that kind of thing. So I wanted to return to, I suppose, some broader trends we're seeing in this period of greater uncertainty. You mentioned a couple of kind of interesting talking points before we start recording. To kick off with one, let's talk about currencies.
• 14:04
  So for those who don't know, if you're in a period of kind of market stress, uncertainty, and so on, historically, we've tended to view, I suppose, the US dollar and also the Japanese yen as safe havens. So assets there can end up getting a boost. And if you hold set assets, that can offset some of the kind of drops you might see elsewhere in your portfolio. Do you now see a shift in that dynamic?
• 14:33
  Peter Dalgliesh: I do have cautions around the US dollar for all the reasons that we've touched on. I sort think that international investors are over indexed to The US. And when I layer that with purchasing power parity, so conventional theory around FX fair value, then the US dollar remains modestly overvalued. I think putting those two factors combined makes me a little bit too hesitant around assuming along the lines of what you just described, which is in a risk off environment, the dollar appreciates, US treasuries rally. Yep.
• 15:15
  Yep. And gold would probably typically do you'd expect that to do likewise. But what we've seen in a number of these geopolitical incidents, crises, is actually the reverse has occurred, which is that the dollar hasn't strengthened. If anything, it's experienced some weakness. Yeah.
• 15:31
  The treasuries haven't offered that ballast, and I think there are a variety of reasons around those which we haven't touched on yet, which is one of my two bugbears Mhmm. Is that I think there's been a complete inversion between the developed market status of good management, careful governance So you're talking the emerging markets.
• 15:55
  Dave Baxter: Of government bonds here
• 15:56
  Peter Dalgliesh: and Yes. Yeah. But what that why is it so important is because the outstanding debt in developed markets, you'll struggle to find, with the exception of Germany, a developed market with a debt to GDP ratio of less than a 100% now. By contrast, the emerging market countries, yes, you you will find some exceptions, but for the core larger emerging markets, they have debt to GDP ratios of roundabout to a 50 to 85%. So that seesaw has completely inverted at a point in time when I think the domestic funding capability with an emerging market is becoming ever more apparent.
• 16:37
  What that what I think that means is that the volatility in emerging markets has scope for being dialed down. Meanwhile, I think the risk premium in specifically developed markets and specifically when it comes to those sources of safe havens, so US treasuries
• 16:54
  Dave Baxter: and the and the US dollar looks more questionable. So you then saying that so, you know, emerging market debt, which is generally perceived as being kind of riskier bonds, could that become more stable? And in turn, could I mean, you mentioned kind of US government bonds, treasuries, but also, you know, gilts or UK government bonds have had quite a volatile few years. We had the mini budget back in 2022 and so on. Do you think those are kind of tipped to be more unpredictable, more volatile in the future?
• 17:28
  Peter Dalgliesh: I think the volatility, to your point, in those developed market bonds has scope to increase. In contrast, I think the volatility in in the in emerging market debt, I do think over the medium to long term, there's real justifiable reasons why that can come in. Now it's important to to stress this is over the medium to long term. Yeah. You know, on the short term, as we've seen year to date, everything and anything can happen and probably, unfortunately, will happen.
• 18:01
  Yeah. You know? So those are the sort of dynamics that I would keep in the forefront of investors' minds.
• 18:08
  Dave Baxter: And would you expect emerging market debt to behave like a safe haven, or is that a bit too much of a stretch?
• 18:13
  Peter Dalgliesh: That's too much of a stretch at this point. I think in ten years' time where we'd have the same conversation, I think that'd be a valid question at which point I can sort of say with greater confidence that, yes, the two regions would be converging.
• 18:29
  Dave Baxter: Yep. So let's turn to you know, we've discussed a bit about safe havens. So it's a natural opportunity to talk about gold, such a topical asset in recent months, recent years. I've been kind of fascinated by gold because in my view, it's almost started to pave a bit differently to a safe recent times because you appear to be getting some of this performance chasing. And then when you get some periods of stress, you actually see gold kind of sell off, which might be relating to people just see as a source of liquidity because it's their strong performing investment, so it's easy to take some profits.
• 19:08
  Do you think it's still a reliable haven, or should we view it differently?
• 19:13
  Peter Dalgliesh: I think we need to to wind back and understand what have been the drivers of gold's recent appreciation. And when I say recent, I we are talking eighteen to twenty four months, not just merely the last sort of six months or so. And, really, the drivers have been since 2022 and Russia's invasion of Ukraine is geopolitical increased geopolitical risk. And unsurprisingly, specifically emerging market central banks woke up and realized, actually, we've got too much US dollar exposure, which can be confiscated. Whereas, actually, if we have invested in gold, we've got it in our vaults, then, actually, we've got greater confidence in the security and surety around that.
• 20:01
  That's number one. Number two, you've got a president who deliberately wants a weaker dollar.
• 20:06
  Dave Baxter: Mhmm.
• 20:07
  Peter Dalgliesh: Yes. You know, so that is almost an explicit publicly stated strategy. Well, in that environment, you wanna hedge to that. And so institutional investors have been embracing that as a means of insurance. And that, I think, is the key bit around gold.
• 20:24
  It should be seen as a source of insurance for the rest of your portfolio. So it's an important built block within your portfolio, but that it shouldn't necessarily be seen as a trading tool. Mhmm. To your point, I think what we have seen specifically this year so far is that there's been a flood of retail money, and that that retail money is much more speculative. It's more trading oriented.
• 20:51
  Yeah. And that's it that is a warning sign that things are looking frothy, and therefore, we shouldn't be surprised if we see some reset. In terms of valuing gold, it's notoriously difficult because it doesn't generate a yield, and therefore, you haven't got a net present value. You can't do a DCF, And it's very hard to do a comparative analysis versus the yield on government bonds, the yield on equities, etcetera. So it it's difficult in that.
• 21:20
  It's a bit feely touchy, in inverted commas. There are studies that do, which I and I was reading about this, which is the ounce so an ounce of gold, how many dinners does that buy you in the Savoy Hotel, for example. And based on these kind of measures, actually, even after the appreciation in gold, it's still not hideously stretched. So it comes back to to to my personal view, which is that what is the purpose of gold within your portfolio? It is a source of insurance against a, you know, an upset, a wobble, not only in fixed interest, not only in alternatives, which we might come on to, but also equities.
• 21:59
  Dave Baxter: Yeah. So, yeah, let's come on to what potential alternatives. I'm interested to I mean, this has always been a difficult question, I should caveat, but I'm interested to pick your brains on what still serves its role as a diversifier beyond what we've already discussed?
• 22:16
  Peter Dalgliesh: So I think what we haven't touched on is the risk of inflation. You know, there's a working assumption amongst consensus now that we're gonna get some further interest rate cuts because inflation's coming back down towards the 2% target. You know, to the Bank of England is saying they're gonna be 2% by 2027. I have some concerns around this. I don't think that that increased nationalism I was talking about and in conjunction with the the desire and want for security around energy, commodities, food, or as well as a reduction in just in time deliveries across the global supply chain.
• 23:02
  All of that points to me in the direction of some upward pressure on inflation. In that environment, what do we want, I think, in a portfolio? We want real assets. We've already touched on gold. That's why it's there.
• 23:13
  And for some, gold is an inflationary hedge. For others, it's deflationary hedge. You know? So as I say, regardless, it's an it's an in a source of insurance. The other sources of real asset exposure, though, are the likes of timber infrastructure whose contracts the underlying companies tend to have contracts which are inflation linked.
• 23:34
  So that is something that I sort of think is really important. I would definitely include commodities within that for all the reasons we've discussed. And I think that's not only industrial commodities. It's not only precious metals, but it's also food. So those food commodity items, I think, shouldn't be disregarded.
• 23:51
  The fact that we've going through this horrendous to a weather period Mhmm. And I I was listening to the radio this morning, and it sort said, you know, after a week of being underwater, winter barley is dead. So that has an implication of what the sort of future harvests might be in the summer and the read through of that. So these are all factors which I think are important why real assets has a real has a genuine place and purpose within a portfolio. The additional element within alternatives, I do think in a world of increased dispersion, you know, so it's not all just one way traffic, that the opportunity for absolute return and hedge fund managers, I think, is increasingly of interest.
• 24:38
  And I know it's it's a bit of a Marmite.
• 24:42
  Dave Baxter: I about to say a lot of people have been pretty let down by absolute return. You know, they're all the way in the wake of the financial crisis, and then we had these big funds that did basically nothing and then even managed to lose money in rising markets and so on.
• 24:55
  Peter Dalgliesh: So I think that's incredibly valid and which goes exactly back to my point which we were talking about earlier, which is you need to really do do do your due diligence on the underlying funds. Track record is crucially important, particularly in periods of market stress. You know? The they they have a role in your portfolio, and if if you don't have proven capability of delivering on that role in times of market difficulty, well then I would encourage people not to go near it.
• 25:25
  Dave Baxter: Okay. And finally, an area we haven't really got to grips with yet, but as part of this kind of, you know, more uncertain periods, people naturally are interested again in defense stocks, which was, you know, very understandably a very taboo area for a long time and seems to have been become more mainstream. But to my eye, it's not that straightforward to take on that exposure via a kind of broad tracker because they're not always that massively, at least directly present in certain markets. So how would one go about trying to, like, take on some of that exposure? So I think
• 26:08
  Peter Dalgliesh: you need to, like you've indicated, sort of look at and think about it a bit more broadly. So take the blinkers off. You can wear the blinkers, I hasten to add. I think there is a Deutsche Bank defense ETF which has it has done what it said what it says on the tin. Yeah.
• 26:23
  You know? So they do exist. I think if you were a value oriented investor, you might struggle with it because a lot of valuations are now after the rally.
• 26:35
  Dave Baxter: Huge share price.
• 26:36
  Peter Dalgliesh: Really, really quite stretched or challenging. So it's then a question of, you know, do we think this theme has durability to it? And for all the reasons we touched on, it's difficult to see why at this point it's gonna suddenly dissipate. So I think it's then a question of, right, well, can you gain access to it tangentially? And there are two ways which sort spring to my mind.
• 27:04
  One is through commodities. Yeah. Because defense expenditure has an enormous amount of commodity element to it. Yeah. If you think about conventional defense, whether it's, you know, to a hard equipment or whether actually it's the technology that goes into defense, because this is another element which people fail to fully understand, defense investment is incredibly tech rich.
• 27:32
  And so to that extent, I do think that the commodity space is being further bolstered by these thematic trends when it comes to defense, and it's especially so, you know, in rare earths. Rare earths, to all intents and purposes, China has 85% plus control and is responsible for the processing of rare earths, 85% in the world. You can understand why The US is uncomfortable with that. That, I think, lends itself, you know, hoists a flag of interests, which is actually you can invest in commodities. I think you can invest in those providers of finance to defense companies, you know, because the ramp up in CapEx amongst defense manufacturers, that's gonna continue.
• 28:25
  It's not gonna be on the
• 28:26
  Dave Baxter: scale of AI. So how would you do that? Are you talking about bonds?
• 28:30
  Peter Dalgliesh: No. I'm thinking more in terms of commercial banks. Right. Yeah. Because the debt side of things in terms of the investment grade credit, assuming they will be investment grade issuance, yeah, that is an opportunity, but to all intents and purposes, I don't think that's necessarily gonna give you the alpha opportunity that you could potentially extract via an equity.
• 28:51
  The equity side of things is through the financials financial sector, in which case you then drill down into those geographical areas and regions and indices where financials makes up a regional heavier proportion. In that regard, you can see The UK's financial position is pretty attractive. Europe, likewise, but the standout actually is to the Asia Pacific and emerging markets. Now they are less on the radar versus the defense expenditure programs that have been announced in Germany and Europe specifically. Yep.
• 29:30
  But we've got Sanae Takahichi winning in Japan who has made a commitment to increase their expenditure on depend defense. That will have a Japanese orientation to it, but I suspect the Asian defense manufacturers will similarly be rubbing their hands in excitement as to what they might be able to potentially with the expansion in the market that might be ahead of them.
• 29:51
  Dave Baxter: So fresh legs to that trade. Potentially. Yeah. So that is all we have time for, but thanks very much for your time, mister. Not at all.
• 29:57
  Thank you. And thank you for watching and for listening. Let us know what you think in the comments, and catch you next time. Hi.