Echoes: What’s your hedge if tech optimism falls short?

Loomis Sayles’ investment industry veteran David Rolley distils 40-plus years of investment wisdom to explain how we got to where we are, why the optimism around AI puts us in a particularly perilous position, and what it all means for fixed income investors.

There has been no shortage of defining moments over the past 25 years. As a seasoned investor, what stands out most from an investment perspective?

David Rolley (DR): I’d actually highlight two market turning points, twenty years apart. The first is the US dollar bear market and inflation peak of 1980, even though many now in markets weren’t even born then.

Back at the end of the 1960s and into the 1970s, we saw the breakdown of what was thought a stable international order – the collapse of the Bretton Woods system. The US failed to raise taxes to pay for the Vietnam War, leading to persistent inflation. Our partners abroad wouldn’t import that inflation, so the dollar peg was abandoned, and the US experienced a nine-year bear market for the dollar and accelerating inflation, which peaked at 13% by 1980.

Paul Volcker’s ‘whatever it takes’ monetary regime led to 20% short US Treasury rates and double-digit long bond yields. This brought about dollar dominance, spectacular bull markets in US fixed income and equities, and a lasting lesson: policy changes – when big enough – reset asset classes and investment paradigms.

Which brings us to the second turning point, which was circa 2000. But it was not the dotcom bust. It was China’s global emergence. Because, suddenly, China wasn’t a marginal footnote: it became the biggest single force moving international markets. As portfolio managers at Loomis Sayles, we shaped portfolios not to lend directly to China – as that carried opaque risks – but to the countries and companies supplying everything China would need: iron ore, copper, oil.

The result was performance awards and a global business built around the idea that Chinese demand would revolutionise commodity markets. Recognising those paradigm shifts, and positioning for the second- and third-order effects, has been the story of my career.

How did those moments change how you thought about market risk, or how you tackled portfolio construction?

DR: After Bretton Woods, many ‘dollar bears’ failed to adapt and missed out on the rally when US capital markets reasserted themselves. The lesson: don’t anchor to old regimes. Capital flows became more important than trade flows and US markets outperformed for years.

The China story, meanwhile, was high conviction and contrarian in two ways. First, after the Asian debt crisis, most investors abandoned emerging markets – especially in Asia. Second, our decision to avoid lending to China itself and instead focus on hard-currency bonds from suppliers like Brazil, Peru, and Korea was rewarded twice over: risk premiums were high, and the demand picture was unmistakable.

Key, though, was differentiating ‘market risk’ from ‘actual risk’. For instance, I recall one particular iron mining company in Brazil that could borrow at 10-12% dollar rates for ten years – an incredible premium given its mines’ 200-year reserve lives as collateral. If you looked past market fear and did your research, real risk could be much less than perceived.

Was it especially controversial among your colleagues to take a contrarian view on China at that time?

DR: It was a transition period. The portfolio manager who hired me and my colleague Ken Buntrock retired in the summer of 2000, so we benefited from what you might call ‘benign neglect’. Basically, we had the latitude to pursue what our fundamental analysis told us were favourable risk-reward prospects.

Global fixed income was also a small product. In that regard, being nimble, with a close-knit team, helped us act. If we’d been a larger team with less independence, consensus might have driven us away from what proved to be a big win. Risk premiums were high post-Asia and Russia’s default – remember, Russia was pumping nine million barrels of oil of a day and they defaulted on most of their debt.

So, there were casualties all around and the risk premium was there for a reason. Taking risk in South Korea, then trading at spread parity with Argentina, was considered brave. But again, you got paid far above fair value if you did your analysis.

That feels like a different world now. How do you explain these periods to younger colleagues, maybe those who’ve started their investing journey after Covid, and so have never actually experienced what markets were like in the 2000s?

DR: My main advice is to diversify your sources of information. Don’t just live on Bloomberg screens. If you’re a country specialist, consume local media. Broaden your perspective – cross-sectionally across markets and regions, and across time, by reading history. You’re looking for patterns. Pattern recognition matters: studying not just financial but also economic and even military history helps you spot similarities with today’s events.

Markets may appear new, but they often rhyme with the past. You need to see how policymakers responded before, what worked, what failed, and use that to anticipate new responses. There is a tendency for generals – and central bankers – to fight the last war, so knowing that gives you some degree of anticipation about how policymakers may react to a new challenge. The past isn't enough, but the present isn't enough either. You need both.

What about fixed income portfolios specifically? How has your lived experience of events helped you to manage risk, uncertainty and ambiguity?

DR: Fixed income gives you three levers: currency, duration, and credit. Of these, credit offers the best risk/reward relationships. Credit dislocations, driven by surprises, are often biggest – and that’s where you can outperform.

At Loomis Sayles, we ensure research is actionable – delivered timely to managers. Our teams must operate before full information is in the price, so a degree of comfort with uncertainty is necessary. Wait too long, and the edge disappears. But jump too soon, and you get blind-sided by what you don’t know. Achieving optimal uncertainty – enough information to act, not so much that value is gone – is key.

And remember, bonds are not stocks. Even if everything goes your way, at best you get par and the coupon. But you can lose 100%, so concentrated bets come with risk. There may be factors – credit, currency, duration – you haven’t considered. I’ve seen ‘big brains’ lose an entire year’s returns on one bad macro bet. Diversification is a simply a survival mechanism.

Fast forward to 2025, and there have been several perilous moments – from the market volatility of Trump’s tariffs to the market concentration of AI-fuelled tech stocks. Are these unusually uncertain times – so much so that we could be at another inflection point?

DR: I think these are unusually uncertain times, but I don't think the tariff volatility was ever the headline. That’s the story that's above the crease – when we used to fold newspapers and read them in our laps rather than on our smartphones. But if I look at the landscape of capital allocation in October 2025, the market has calmed down about tariff risks and tariff volatility.

Rather, the single dominant theme in asset allocation has been the optimism around artificial intelligence and its ability to generate tech revenues over the next five to ten years. And that dominates the price action. Nvidia recently became the world's first $5 trillion company. There’s a huge optimism around AI’s impact. Capital spending in energy and data centres is exploding to support this vision.

But with the S&P 500 increasingly dominated by a few tech names, high concentration raises the risk of disappointment. If something underwhelms on growth or China’s offerings undercut US tech, the market is vulnerable.

In a shock that hammers equities – especially a US tech disappointment – non-dollar fixed income, not just Treasuries, will likely be the best hedge. If equity wealth collapses, recession follows, and policymakers cut rates. Other currencies may rally as investors diversify out of over-owned US assets, so global bonds stand to do well in that scenario.

Bonds hedge deflationary shocks well. But in inflationary shocks – like 2022 – inflation rips, bonds sell off first, and then stocks fall as multiples compress. The ‘hedge’ becomes a loss amplifier. So, you must distinguish whether we’re facing a deflationary or inflationary regime: they demand opposite portfolio responses.

Given it’s difficult to get off the AI train, how worried should investors be about the future?

DR: I’d recommend always being moderately concerned. There’s encouraging signs: a rivalry, not a war, seems underway between the US and China. If it stays that way, investors will do fine. But a real conflict would be a disaster.

As long as the US and China get along, and the superpower competition remains economic, we’ll see more fragmentation, less globalisation, and new opportunity centres – the Indian Ocean, Africa, and the Gulf – rising as capital flows shift. Middle-income ‘traps’ will become ‘opportunities’ for investors as young demographics and capital meet.

In short, is this time different?

DR: It’s both different and familiar. We’ve had eighty years of a certain kind of global financial architecture and it’s going to be different now because we have a different power structure. We’re shifting to a world with distributed powers, less US hegemony, more local variation, and perhaps different patterns of finance and payment, through digital currencies and stable coins. Maybe even AI-facilitated fraud. It's still a world where you need caution, and that means you need research.

Familiarity with basic economics, history, local politics, and even geography becomes more valuable – I mean, it's interesting that on a warming planet so many of our powerful financial cities are seaports and large parts of them will be underwater. So, maybe, the killer trade is Dutch engineering companies because they've been operating in a country that's been underwater for quite some time and doing very well with it.

Investing has yielded a terrific 40-plus year career for you – and counting. What’s your one piece of advice for those just beginning their investment journey?

DR: Get a broad education. Math and computer science are foundational, but liberal arts – history, economics, geography, psychology, even the physical sciences – matter too. Investing is a liberal art: it’s about human incentives and behaviour as much as numbers. You won’t thrive with technical skill alone; you need context and perspective.

Interviewed in November 2025