Navigating Global Change: Strategy, Infrastructure, and Opportunity with Jeremy Schwartz and Sam Rines

[00:00:25] Sam Rines: Thank you for having us,

[00:00:27] Doug Heikkinen: Sam. Jeremy has been with us before. Can we start by having you tell us a little bit about yourself, about your career, and what your charge is at WisdomTree.

[00:00:38] Sam Rines: Sure. My career started off on the buy side, mostly hedge funds and institutional type strategies for pensions and wealthy individuals.

Followed by a stint as a chief economist and strategist for a large RIA. And then a little bit of time on the sell side, followed by joining WisdomTree about 18 months ago. And have known Jeremy for quite some time. And finally get to work with him on a daily basis now.

So it is a great world.

[00:01:17] Doug Heikkinen: It's a great world and interesting world. So let's start by focusing on European strategic rearmament and defense realignment. Sam, how is NATO's new commitment to the 5% GDP and defense spending reshaping Europe's military industrial infrastructure, and what are the investment implications?

[00:01:40] Sam Rines: To me this is both one of the, call it one of the fundamental changes that we have seen over the past 30 years. You have a very significant stimulus package coming out of Germany, and frankly it's one of those that has legs. This is not a one time shot in the arm type of stimulus package or defense rearmament package.

It's very much a multi-pronged, long-term approach. So Germany said we are going to spend a significant amount on defense. We're also going to do it on infrastructure. Infrastructure gets overlooked a lot in the conversation, but infrastructure's very important if you want to be resilient in the face of threats. You want to have an electrification strategy that not only allows you to be less reliant on adversaries, the easiest example there is Russia, but also allows you to be much more independent from the vagaries of natural gas prices or oil prices. You really want to, particularly if you're not producing your own.

Which Europe does not produce nearly enough to be self-sufficient on the hydrocarbon side. So to me it's very much one of those 5 to 10 year type long-term stimuluses, that could be larger than we think. The debt break was lifted in Germany. So anything over 1% of spending, doesn't need to be, doesn't need to go back through any of their, call it machinations, and can just be spent.

So there's a lot of money that's going to be spent and it's visible. You have companies that are beginning to have very significant backlogs and they're looking for more capacity. there's not enough capacity to actually build out what they are trying to build out. So you have a lot of factories going into the ground.

That means jobs, that means a reinvigoration of the continent. And this time what happens in Germany doesn't stay in Germany, and it's a good thing.

[00:03:43] Doug Heikkinen: Sam, I'm going to stick with you. What does the term, multi-decade fiscal frameworks mean in the context of European rearmament, and how does that differ from previous short term stimulus cycles?

[00:03:57] Sam Rines: Sure. This is really interesting, because normally it would be, we want to re-arm or we need more jets, fighter jets. We're just going to buy a bunch and then it's over. This time it's much more about how do we build the infrastructure. The plants, the roads, the railways, et cetera, that they need in order to be able to have the defense capabilities and the deterrence capabilities moving forward.

That to me is the difference here, is that this is a, we are going to look out five to 10 years, this is what we want to be capable of. And if we, if Europe does it, it will be an actual deterrent against further aggression from Russia or other adversaries. That's really the difference between a lot of the, we're going to buy 30 fighter jets and we're going to get a pat on the back from Lockheed or Boeing.

This time around, it's we are going to make sure that we are, we being the European continent, is capable of defending itself and being a significant deterrence to further Russian aggression or other aggression that may happen in the future. They are going to be, over time, they're going to have the capabilities to really say no.

We have a credible military, we have a credible deterrent. And that is very very important. And particularly for investors that are looking and saying, these stocks look pretty expensive, or whatever it might be. They might look pretty expensive on today's basis, but you have to look out and say, what does it look like in five to seven years?

This spending isn't going lower. If GDP grows, so does the spending. It's this interesting positive flywheel where infrastructure spending tends to be a pretty good multiplier effect. So for every dollar, you tend to get back a little bit more than a dollar in economic output.

GDP goes up a little bit more. Defense is a little less of a multiplier. It tends to be much more long-term in nature. When you spend significant amounts of money on defense, you tend to have technologies that are used by civilians in the next decade or two. So again, this is a shorter term shot in the arm for the European continent in the infrastructure spending in particular, and possibly a much larger than anticipated shot in the arm in 10 to 20 years when some of the technologies they develop are able to be used by consumers.

So it's a very, very interesting thing. You look back when the US and USSR were competing during the Cold War, and a lot of the technologies that were used in the space race are technologies that we take for granted today. Computers, cell phones, communications. A lot of that was developed for being able to go to the moon.

So to me there's a lot of things that could come out of this that we simply don't see today.

[00:06:52] Doug Heikkinen: So Sam, speaking of stocks, which companies are leading the European defense resurgence like Saab, Rheinmetall, BAE, Leonardo, and what specific growth signals are investors seeing?

[00:07:04] Sam Rines: To me, one of the most interesting ones for, particularly for US investors to look at and consider is Saab, right? Because most of what we, when we think of Saab, we think of the little interesting convertible cars that were sold here for a while. That is actually bankrupt by the way.

They sold it off to GM and GM didn't do so hot with it. So anyway, but they have a very interesting fighter jet. They were, they make a great fighter jet that's cost effective. And they make submarines. And if you look back, call it during the late teens and early twenties, there really wasn't that much of an interesting scenario for Saab.

It was king of just bouncing around on its annual earnings. It would be something between 250 and 350, and it never really seemed to get any momentum. Come the invasion of Ukraine, you begin to see actual earnings begin to build, and begin to really be more visible in the out years.

So it's not as though Saab is simply saying, we build cool planes and we have submarine division and we do this and we do that. It's actually already turning into earnings. This is not something that is hypothetical. It is a very powerful earnings machine there.

When it comes to something like Leonardo, not da Vinci by the way. Leonardo, the defense contractor. Leonardo is, call it one of the leaders in technology and drone technology. Both hardening drones, for use on the battlefield, but also anti drone technology, being able to knock drones outta the sky, et cetera.

You have a lot of this really, and they're, again, doing very well and have a very long term outlook, and have an order book that has grown dramatically as well. But at the same time, you also have companies like Rheinmetall that had a slightly less than, I'd call it "interesting" earnings report.

And it sold off a little bit in the next few sessions. But the interesting part to me about that was one of the problems that Rheinmetall had was, it's backlogs were getting too big. It really needed to figure out a way to increase capacity more than it had. That's a good problem to have when you have a decade's worth of orders coming in and already have a very large backlog that you're struggling to handle.

You have too much business. That's a good thing. That's not a bad thing.

[00:09:38] Doug Heikkinen: Jeremy, let's get you in here. In what ways has Europe shifted from reliance on external US military technologies to sovereign domestic capability building, and how is that supported by EDIS and re-arm Europe?

[00:09:53] Jeremy Schwartz: I think everything you heard from Sam just now is a big testament to the sort of this long-term nature. And, I love this point Sam makes about the technologies that are going to come from the big defense spending could the usher in this whole new technology wave. Like you think about the markets for the last 15 years have been driven by US leadership in technology, the magnificent seven being the key factor driving all the markets, and you haven't really seen technology leadership out of Europe. And if all the spending that goes to this defense technology leads to new companies and new technologies coming, this could usher in a sort of longer term cycle for Europe and bringing some new tech excitement to the market.

So we do think this is a bigger shift and perhaps, the US exceptionalism narrative, that's the only place to be is the US may have to start shifting here over the coming years.

[00:10:47] Doug Heikkinen: So Jeremy, what next generation defense capabilities such as cyber sensors, AI, sovereign defense infrastructure, are emerging as the new strategic axis of the European defense?

[00:11:01] Jeremy Schwartz: Well, the battlefield is changing. Yes, you need the aircraft carriers, you need the planes that Sam talked about with Saab. But you also need the drones. When you look at the sort of swarm technology of drones and how much you can get done, like where the Houthis have effectively shut down shipping in the Red Sea.

And it's, and we haven't really been able to overcome that. You get these sort of smaller, more nimble technologies that, the big ships could become a liability. So I think it's going to be interesting as that defense, the new technology shift and who are going to be the leadership in the new technology.

You're going to have to see new companies come out to fill that void there.

[00:11:44] Doug Heikkinen: Let's turn our attention to WisdomTree's Geo Alpha strategy and it's focus on turning risk into opportunity. So Sam, what's the concept of Geo Alpha and how does it position investors to benefit from geopolitical disruption rather than retreating from the volatility?

[00:12:01] Sam Rines: So the geo alpha framework is based on the, call it the starting notion that we, you don't have to run away from, call it the fractures that we're seeing in the global economy. You can take a deeper dive and pay attention to, who does it actually benefit in the longer run?

Who is getting the orders today that would've gone elsewhere, or who's going to get the orders tomorrow that wouldn't have existed, would've gone elsewhere, et cetera. So it's predicated on this idea that, geopolitics is not always going to be something that's oil related, right?

You're not just buying an oil spike and hoping that oil is going to go higher. What you're really paying attention to is, who's building the rebar in Poland and who owns the concrete in Ukraine and Poland for the rebuild of Ukraine, if there, if and when there's a peace deal. Who is going to benefit longer term from the infrastructure spending that you're seeing in Europe, for example. Who is going to benefit from the shifts we're seeing in supply chains. So it's largely going to be largely predicated on taking advantage. I call them the advantageous risks of geopolitics. Taking advantage of the risks that are there and could emerge. And, looking at how that shapes consumer preferences, how that shapes technology, and how that shapes investment as we move forward.

[00:13:34] Doug Heikkinen: Sam, what's the friends trade and how is it different from friend shoring? How should investors interpret this shift in supply chain strategy?

[00:13:44] Sam Rines: Yeah, this is an interesting one because friends trade is, it's similar to friend shoring, but different in subtle ways. It's, who are we actually, trading more with, right?

It's where does the LNG go from East Texas? It goes to Germany, it goes to Europe. A lot of it goes to Europe, but a lot of it also goes to places like Japan, Korea. Et cetera. So a lot of it is not simply looking at where is, where's the incremental, call it capital expenditure going in the ground, whether it's Mexico, Europe, Japan, Korea, India, Australia.

It's looking at where where's this trade actually going? How are we evolving it as we move forward? How are we beginning to not necessarily completely break away from China, but how are businesses reacting to tariff threats, the potential that you're going to have significant sanctions levied against China or India because of the importation of Russian oil. It's thinking about it from that perspective of, we do have these long-term strategic friendships. They don't necessarily lead to immediate investment in the ground when you have the type of, when you have the type of tariff related headlines that you see every day seemingly. A lot of times it takes a lot longer.

It's a much more of a slow burn. But you do begin to see places that normally wouldn't have been that interesting to invest in. Frankly, you drive through parts of North Carolina that were somewhat left for dead 30 or 40 years ago that specialized in apparel. All of a sudden they're booming again because apparel and furniture manufacturing is moving back to those sections of North Carolina, where people had a, they knew how to make the furniture, they knew, they know how to make clothing, blue jeans in particular. So you begin to see a lot of where the trade is beginning to move, both on a domestic and an international basis.

[00:15:54] Doug Heikkinen: Jeremy, how is GEOA's index methodology structured? What key themes underpin its allocations?

[00:16:02] Jeremy Schwartz: Yeah, this is, when Sam gave the background of how he joined WisdomTree, he had been focusing on macro, but also this geo, the intersection of geopolitics with the macro.

And we've been working on some model portfolios with him called geopolitical risk aware models to try to allocate global portfolios towards, into using ETFs and building blocks to construct a global allocation. When we hired him, we're leveraging, you could see all of his interesting insights across the markets and across these various themes, and I'd say GEOA and the Geo Alpha Opportunities Fund we launched, is really putting all this thinking into one real strategy. And we have four sub components of the allocations in the index. So there is this geopolitical events that are impacting things. That ends up being 25 to 50% of the index. We'll do fiscal and monetary policy, what's happening around the world, and where do you want to be allocated as a result of either the fiscal spending that we just talked about, Europe or different trends changing.

That could be 5% to 25% of the allocation. New technologies is a bucket that. Could be 5% to 25%. And then shifting consumer preferences, 5% to 15%. And we have an index committee that Sam is a big part of. And we're looking for what are the right stocks that reflect all these shifting dynamics around the world.

And, I think the geopolitical franchise, we now have, today we have four funds in this, what we call geopolitical aware funds. What we call opportunities funds. So Geo Alpha is one. We have a European focused one, European opportunities, Japan opportunities, and then European defense in particular. And we're about to launch some more defense funds for Asia and global. I think this, the framework is identifying what's happening around the world and then where do you want to go? And I'd say GEOA is the flagship of the ideas. You could do specific ones for Europe or Japan, but this is the global franchise for how to allocate around the world.

[00:18:07] Doug Heikkinen: So Jeremy, continuing on with GEOA, what are the risk considerations that come with a Geo alpha centered fund like this? Consider concurrency fluctuation, security exposure. Geopolitical uncertainties and regional concentration?

[00:18:23] Jeremy Schwartz: It is a global portfolio. Today there's, I want to say 60 holdings in the portfolio.

When you look at the S&P 500, people worry about valuations. Our basket is cheaper than the broad US market. So from a pure valuation perspective, you'd say we're a lower valuation risk. I think people have been, I talked about US exceptionalism and people have been overly focused on the US market and there's a growing concentration at the top with the big tech leadership.

Our portfolio's going to be more diversified in that way. But it is going to have non-US exposure in the basket. Now we're on a global basis, a little underweight, the US, compared to ACWI. So you know, ACWI is two thirds, actually All Country World Index is two thirds. We're just over mid fifties percentage on Geo Alpha.

And so it's a nice balanced portfolio across sectors and stocks. We're going to be less tech. So if tech has, if the Mag seven starts to underperform a little bit from valuations, we're going to be more industrials, is our sector tilt. We're going to be a little bit less financials.

But I'd say it's trying to reflect our best idea of what's happening around the world, and trying to manage risk in a thoughtful way.

[00:19:44] Doug Heikkinen: All right, last one Jeremy. How can investors incorporate geopolitical strategies like this within a broader portfolio to capture geopolitical tailwinds while maintaining diversity?

[00:19:56] Jeremy Schwartz: I mentioned, at the start of talking about geo alpha opportunities, that we do have a model portfolio team. Sam has been, I mentioned, running some of these geopolitical risk where models. So if you wanted a whole set of recommendations across the global ETFs and fixed income markets, we do also offer model portfolios.

Geo Alpha in a way is a cornerstone of, it could either be a global allocation or it could be competing for your international allocations. As people start looking, they've been overly concentrated in the US and this could be one of the ways you start to get some international exposure blended in with that. And so we think this would be a cornerstone of many global portfolios.

[00:20:38] Doug Heikkinen: Great. Jeremy, Sam, such great information. You have fascinating jobs. Thanks so much for joining us.

[00:20:46] Jeremy Schwartz: Thanks for having us, Doug.

[00:20:48] Sam Rines: Thank you.

[00:20:49] Doug Heikkinen: To learn more about GEOA and WisdomTree. Please visit wisdomtree.com. We are on all social media platforms @Advisorpedia. Please give us a follow. For our producer Tory Miller and everyone at Advisorpedia, thanks so much for listening.

[00:21:09] Disclosure: Before investing, carefully consider a fund's investment objectives, risk, charges, and expenses contained in the prospectus available at wisdomtree.com/investments. Read it carefully. There are risks involved with investing, including the possible loss of principle.