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Markets: 'I would caution against' writing off Big Tech, strategist says

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Natixis Investment Managers Solutions Portfolio Strategist Garrett Melson joins Yahoo Finance to discuss various aspects of the markets and his outlook for 2022.

Video transcript

- Bring in our first market guest Garrett Melson, Portfolio Strategist, Natixis Investment Managers Solution. Thank you so much for joining us today. You know, I want to get your-- you know, what do you make of the action today? Because yesterday we saw this massive sell off on one case of this new variant being found. Now we have a second one in, you know, Wall Street's backyard in New York City, and yet markets are rebounding. What is going on?

GARRETT MELSON: Yeah, you know, I think it has a lot of investors pretty confounded at this point. And, you know, generally when we have some of these sizable moves in markets, I think obviously we try to gravitate and try to identify some sort of catalysts behind it. You know, in our opinion, I think it's a little bit more just reflective of the year we've had, and some of the gains that a lot of investors are sitting on.

When you kind of consider the markets up north of 20%, a lot of investors are sitting on some pretty hefty gains for the year. And I think, you know when, you consider all of those headwinds that have popped up over the last couple of weeks, you know, this talk of a hawkish pivot from the Fed that we're not quite in agreement with but regardless, you certainly have some uncertainty from the Federal Reserve, you have new variant popping up, and certainly some uncertainty out of Washington with respect to the shutdown and the debt ceiling.

So, you know, I think these are all reasons for investors to be a little bit more cautious, and I think you're seeing quite a bit of saying, you know what? I'm going to just take some of my risk off the table, you know, shoot now, ask questions later, and protect that P&L. And I think that's exactly what you've seen here, although, you know, it certainly presents some pretty attractive buying opportunities for those who are looking for those opportunities, and I think we see that today.

ALEXIS CHRISTOFOROUS: Where are you seeing some of those opportunities, Garrett, because we've been talking a lot recently about some valuations getting uncomfortably high for some investors, especially in high tech? So where have you been a buyer, if you have been, recently?

GARRETT MELSON: Yeah, so, you know, I really don't think the playbook has changed all that much. You know, we're still looking at an environment next year, which is very, very robust growth. Nominal growth, I think, consensus is right around 7% now, I think there's a good chance we surprise pretty meaningfully to the upside on that.

And so in that type of backdrop, you want to be owning those names that are really most sensitive to changes in nominal GDP, and that's going to continue to be your cyclical sector. So, you know, you listed off some of those names that are leading today; financials, industrials, energy, materials, those are going to continue to be areas, I think, of opportunity moving into next year.

And again, it feels like a lot of investors are kind of writing off technology, but I would caution against that. You know, there's certainly some cyclical components to technology, semiconductors being one of them that I think really do benefit from that backdrop moving forward next year. So we're still seeing some good opportunity in those spaces.

- I want to ask you, what's a key fear about Omicron right now in the near term? Because, you know, it doesn't look like we're going to face any lockdowns like there are happening in Europe and extensive sort of curbs there, you know, like we had at the start of the pandemic, but is it-- is it that it now delays, let's say, what companies do as far as Capex expenditure, as far as hiring more workers to come back to work. Is it that consumers-- we don't know. Will they go and buy that airplane ticket now?

GARRETT MELSON: Yeah, you know, I really don't think there's much of a material impact, at least from what we know so far. And to be fair, that's very limited, and certainly we'll be getting or hopefully, I should say, we'll be getting a little bit of a better look at just what risk this new variant poses. But early indications aren't all that negative, you know, certainly vaccines suggest to be at least providing some sort of protection from negative and serious cases.

So, you know, from that perspective, if you look back at Delta, there really wasn't a meaningful impact in terms of actual consumption, you know, behaviors of consumers really didn't change all that much. Maybe we saw a little bit of a shift away from services in the early stages of the reopen back towards goods, but overall consumption held up just fine.

And on the Capex front, you know, we still see signs that companies are saying they're going to invest in their businesses and they're doing just that. So I really don't think the risk right now is all that large. And you mentioned it, you know, lockdowns are certainly not happening here in the US. There's no appetite from the government and certainly no appetite from consumers.

I think the biggest risk really is to supply chains. And so if we do see some material disruptions in economies that are still moving in and leaning into that zero-tolerance policy, like what we see out of China and some other countries in Asia, that really poses the biggest risk in our eyes of some further supply chain disruptions. But beyond that, we, at least right now from what we know, don't really see all that meaningful of an impact, the trajectory moving forward.

ALEXIS CHRISTOFOROUS: So, OK, I think it's safe to say you're pretty bullish on US equities in 2022, but I'm curious what about outside the US right now? Are you seeing some opportunities in some of those emerging markets?

GARRETT MELSON: Yeah, that seems to be a little bit of a consensus more recently and some of the outlooks that we've seen come out from strategists across the street. I think that's a little bit too early to be leaning to those trades. Part of it does link back to some of those government responses in response to this new variant.

We do see, as I mentioned, the zero-tolerance policies in some of these EM countries. And in Europe, you do see some of these maybe more targeted lockdowns. But that is where you really do get some of the greater damage from an economic perspective. And that's where some of the larger fallout is. You know, I think it really does just boil down to the fact that get the EM and international trade really rolling, you really need to have a synchronized growth story.

And for that to play out I think we're just simply too early in the playbook here. You know, I still think the first half of next year probably favors leading into the US still, but the back half probably offers a little bit of opportunity. You know, we've been really dealing with these rolling, you know, COVID waves over the course of the last almost two years now. And that's really caused a disjointed recovery.

I think there's an opportunity for a little bit more of a synchronized growth story in the back half of the year, and that would really set off potentially a weaker dollar and that international trade. But in our eyes, it's just simply too early right now.

- And so you are bullish, and you said supply chain issues are the big concern. But what about, are you worried at all that some liquidity may be coming out of the markets right now? You know, for 20 months, that's what's driven growth.

GARRETT MELSON: Yeah, you know, I had actually push back against that. I think what's really driven growth has been consumers and corporates. You know, that's really, really where we've seen growth coming from. It's been the private sector. You know, obviously public transfer payments help that, but I think the organic demand picture has really been the key driver here. And when you look at liquidity, you know, I think that's a term that gets kind of lobbed around and there's multiple definitions for it and the definition you're referring to does matter. What's really going to be driving markets and what affects markets is transactional liquidity and credit liquidity, and those still remain very abundant and that's driven by risk appetite.

The liquidity that's kind of driven by the Fed. That's really much more endogenous within the banking system. And so when you talk about taper and what the impact is, honestly it's really marginal at best. You know, the biggest impact is really to the extent that investors think it matters here.

So, in our opinion, it really is just a matter of risk appetite. Obviously recently we've seen some cause for risk appetite to pull back and you see that in some of the sentiment surveys that have come out over the past couple of days, but looking forward, you know I think there's still some good reasons to be optimistic on the outlook for the US economy as well as US markets.

ALEXIS CHRISTOFOROUS: So, Garrett, finally, what does all this mean for the income or for the fixed income markets? I mean, especially if we're going to see, you know, an advanced taper by the Fed if interest rates are going to start going up sooner rather than later. And in this great chase for yield that continues to happen on Wall Street, where are the opportunities in fixed income?

GARRETT MELSON: Yeah, it's few and far between, to be honest. You know, we're not expecting rates to move materially higher. And I think part of that is that the market's getting a little ahead of itself in terms of pricing in some of those rate hikes. Accelerating a taper doesn't mean that we're necessarily guaranteed to get an aggressive lift off from the Fed. And I think what you're likely to see is potentially some easing of these supply chain bottlenecks, you know, maybe modest monetary tightening moving into the next year, but I think the market is largely doing some of the Fed's heavy lifting there.

And so I think the market is going to be forced to walk back some of those rate hike expectations for next year. But that still leaves you with an environment that's fairly low yields. And so in that environment, you know, I think you really have to question what's the purpose of your fixed income sleeve. For us, you know, we'd like to take our risk in overweighting equities. And so fixed income really serves as that equity risk offset.

There's really no more reliable offset than US treasuries. And as tough as that is with yields as low as they are, I still think that's the best function in a portfolio. But if you're looking for ways to reduce yield a little bit, I think leverage loans are probably one of the best places to find that limited duration and certainly the credit cycle continues to look supportive and defaults remain very much benign.

- Limited duration may be the way to go for right now. Garrett Melson, we will have to leave it there. Portfolio strategist, Natixis Investment Manager Solutions. Thank you again.

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