Tom Hancock, Gmo portfolio manager, joins 'The Exchange' to discuss the Fed, risks of the AI trade and the markets.

New York

Tom Hancock, portfolio manager at GMO, has expressed concern that financial markets are becoming overly optimistic and are not fully considering potential downside risks. He notes that despite recent economic resilience and reduced volatility across asset classes, the impacts of tariffs and possible inflation have yet to be fully realized. 

Hancock believes the Federal Reserve should remain cautious about lowering interest rates, given these unresolved risks. He also highlights that while optimism around artificial intelligence is high, proven commercial use cases remain limited, and he prefers investments in companies with established AI technologies or those enabling the sector, but with more reasonable valuations.

Fed should be cautious about lowering rates, says GMO's Tom Hancock

Our next guest argues the markets have gotten too sanguine. For more, let's bring in Tom Hancock, portfolio manager at GMO. Tom, great to have you with us. Why sanguine? Well, I think the market is, for example, on the tariff side, it's 15% tariff, suddenly no big deal. This would have freaked people out back in March. Or deep sea, people have forgotten about it, and we see the risk trade back on, whether it's AI names or crypto names, market hitting new highs every day last week. And things aren't really that much better. So not that there aren't a lot of things that are good, we don't have a particular bearish view on the economy, but it feels like the upside is getting all the attention. People aren't really looking at the downside risks right now. Since then, though, the economy has proven resilient, Tom. I mean, with each data point, don't we get a picture of a stronger and stronger economy? Volatility is down, and it's not just down when it comes to the volatility index, when it comes to equities. Volatility is down across asset classes, whether you take a look at bonds or corporate bonds or currencies. Doesn't this paint a picture of maybe the macro picture actually looking better? Well, I think volatility being down is kind of my point. That's what being sanguine is. People are not worried about anything. And I think the economic impacts of tariffs have yet to be felt. That's basically inflation kind of around the corner. I think the Fed is right to be cautious about reducing rates on that score. So I do think there are things to worry about right now. So when it comes to the AI picture, you mentioned deep-seek and things aren't that much better. Are you worried about that trade? A lot of your portfolio is exposed to that trade. Yeah. So we are worried about the breadth of optimism around AI. I think the proven commercial use cases are relatively narrow. And so we're trying to focus either on companies, like, for example, the social media, where the AI is kind of proven technology, or we're focused on companies that are, on the one hand, enabling technologies, where you don't have to make too specific a bet. I'm thinking about semiconductor equipment, TSMC names like that. But on the other, where the valuations are still relatively muted. They're not hype names at this point.

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