Trump tariff, Fed stance, DeepSeek: The CEO of this global investment research company breaks it down

Kunal Kapoor, CEO, Morningstar

US-based Morningstar offers investments research and investment management services across 32 countries. Headquartered in Chicago, Illinois, its asset management division managed close to $300 billion in assets. CEO Kunal Kapoor spoke to Moneycontrol exclusively about his take on US President Donald Trump policies, impact of AI on investing and trends in investor behaviour globally.

1. How do you see the Trump regime playing out for markets?

As always, we encourage investors to stay focused on economic fundamentals, as political changes can take years to impact corporate earnings. There was a strong market reaction to Donald Trump’s victory last year, driven by optimism around economic growth and inflation. With the new President now in office, there is more than the usual level of uncertainty around what the administration will enact in terms of policy. We know that there will be a light-touch approach to cryptocurrencies, and we expect to hear more about tax ideas that could dramatically change the attractiveness of some US investment strategies over the next two years. Potentially the biggest wild card for the next few months is Trump’s tariff plan, which has the potential to ripple across most markets and sectors.

It’s also worth considering the possible impact of Trump’s deregulation agenda on markets. The rollback of regulations, particularly in the financial sector, could lead to short-term gains but may also increase systemic risk in the long run.

2. The bond markets and equity markets seem to be playing different tunes. How do you explain this?

The bond market and equity market often have different factors influencing their performance. For instance, while the bond market may be affected by interest rates and inflation, the stock market could be driven by corporate earnings and economic growth.

In 2024, we saw this divergence play out as stronger than expected economic performance led to central banks delaying rate cuts, impacting the recovery of the bond market. Meanwhile, stocks continued to deliver positive returns due to the strong economic environment.

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3. What’s your take on US bond yields and equity markets over the next 12 months?

As expected, the Fed held rates steady in the last meeting, maintaining a cautious stance amid uncertainty. Our analysts say that its next move will depend on incoming data and potential tariff hikes, making the policy path less predictable. In this environment, US bond yields are likely to remain range-bound, fluctuating within the highs and lows set in 2024.

For equities, the tailwinds of monetary easing are fading. Our analysts say that while higher rates may slow corporate earnings growth, strong fundamentals in select sectors should provide some resilience. The key question is whether the economy can sustain these elevated rates without tipping into a sharp slowdown or recession.

4. How have higher interest rates over the past two years impacted investor behaviour?

With higher interest rates, investors have become more cautious and selective in their investment choices. They are seeking safer options that can provide steady returns, rather than taking on greater risk for potentially higher gains. This shift in investor behaviour has led to a rise in demand for bonds and other fixed income investments.

Some investors have also been diversifying their portfolios by turning to alternative sources of income such as real estate or dividend-paying stocks. These assets can offer higher yields compared to traditional fixed income investments but also come with added risks.

5. How have you seen investors' behaviour change post Covid? Are some parts of the trend reversing?

The pandemic period saw a surge in speculative investments, driven by unprecedented fiscal stimulus programs and loose monetary policies. This environment led to a boom in various investment trends:

• Cryptocurrencies: The popularity of cryptocurrencies, particularly Bitcoin, skyrocketed during the lockdown, with Bitcoin's price increasing elevenfold in a matter of months.
• Meme Stocks: The lockdown period fostered a belief among everyday investors that they could outwit professional investors by collectivizing via internet forums, leading to a speculative frenzy in meme stocks.
• Gamification: We saw brokerage firms like Robinhood embracing the concept of "gamification" in investing, making it more of a short-term entertainment activity rather than a traditional, long-term financial endeavor.
• SPACs: Special Purpose Acquisition Companies (SPACs) saw a significant rise in popularity during the pandemic, with their assets doubling within 12 months.

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6. Private markets have been booming, notwithstanding the so-called funding winter. What is the retail investor participation in private markets in the US, elsewhere in the world?

The convergence of public and private markets has really accelerated in the last 12 months, fuelled by innovative investment structures, regulation which has opened private markets to a broader base of investors, and the rise of private credit. In the U.S., the surge in retirees is driving demand for assets that can meet their significant retirement income needs, making private market exposure increasingly appealing for diversification and potential returns. And as firms wait longer to go public, private companies are becoming a larger part of the economy. While the integration of private market opportunities with retail options opens up new avenues for diversification and higher returns, individual investors need to keep in mind the challenges related to transparency, fees, and liquidity.

7. What do you think will be the impact of DeepSeek on big tech? Do you think a broader market sell-off should follow?

The market has reacted strongly to DeepSeek’s potential to disrupt major players, like Nvidia, Microsoft, and Google, by cutting costs and reducing chip dependency. The start-up is challenging the industry's reliance on massive datasets and computational power and could inspire a shift toward more efficient AI solutions. Time will tell whether this AI-driven selloff will trigger broader market correction, as investors heavily exposed to AI’s biggest players may look to diversify.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.