We’re looking to take advantage of this rising interest rate environment: BNP Paribas Asset Management

Daniel Morris, Chief Market Strategist and Co-Head of Investment Insights Centre at BNP Paribas Asset Management joins the Yahoo Finance Live panel to discuss the latest market action.

Video transcript

EMILY MCCORMICK: Well, we want to stick with this topic, but also broaden out on a little bit more about the market action that we're seeing today. We're going to be speaking with Daniel Morris, chief market strategist and co-head of Investment Insight Center at BNP Paribas Asset Management. It's great to have you with us, Daniel. And the first thing I wanted to ask you about was today's market action. Of course, we're seeing green across the board here, really a rebound in some of those tech names that have been badly beaten down over the past several sessions. I'm wondering if you think this is more of a dead cat bounce or if this is really a sign that the past couple of days, we've been just too oversold and are now starting to see a rebound that is sustainable.

DANIEL MORRIS: Well, I probably wouldn't go quite as far as a dead cat bounce. But I think it certainly does indicate that plenty of investors are still quite willing to buy the dips. They feel ultimately that support from the central banks and, in a sense, from the federal government now as well, given the fiscal stimulus that we're anticipating. We'll see whether or not that materializes. That said, we're probably a little bit more cautious. We actually haven't changed our allocations following the correction that we've seen, simply because we think there actually may be a bit more to go. And we'll look a bit later perhaps to increasing our risk assets. Because our medium term view is positive, is optimistic. But I think the near term remains a little bit uncertain.

ZACK GUZMAN: At the same time, too, it doesn't sound like the inflation concerns are going to be going anywhere, you know, when it comes to maybe the pull forward in what the Fed has planned in moving away from accommodation. We heard that earlier in our last hour, Dan [INAUDIBLE] was talking about a 10% to 20% correction supposedly. That could be expected when we do see the Fed start to taper. What are your expectations there as we look at the back half of 2021 around how maybe investors should be playing defense away from some of those growth names that did get hit hard earlier when inflation became the talk of the town?

DANIEL MORRIS: Well, absolutely raising rates is a significant threat to growth in general, chiefly technology. However, we do actually agree with the Fed's view that what we're seeing in terms of inflation, what we will see over the course of the summer is going to be transitory. I mean, we can all do the math, even if we saw that the estimates of what the number was supposed to be were off. At the same time, we gotta realize we have been in an unprecedented environment. Trying to come up with a forecast of what the year and year comps is going to be is almost inevitably to fail.

But the thing we need to keep in mind is really those medium term drivers of inflation because that's ultimately what any central bank is going to be looking at. So because we've had this big jump in oil or because there is this surge in demand, say, for airline tickets or hotels, you know, that's not what drives central bank decisions. So looking at these demographic forces, productivity, growth, all the medium to long term factors for inflation, and really, it's not clear that those have changed at all just because of the pandemic.

EMILY MCCORMICK: And Daniel, when you look at the next 12 months then, especially as we start to get these likely very high inflation readings over the next couple of months, where do you think investors should be looking for opportunity here, where they might have a little bit of safety from some of this volatility?

DANIEL MORRIS: Well, I guess, ultimately, really, you would be in cash. That's not necessarily the way that we're allocated. We're looking at this point to take advantage nonetheless what we see as a rising interest rate environment. So, for example, within the US, we are overweight value and looking at commodities and similar assets should benefit from higher rates relative to those that will suffer. So for now, that's our view.

Later on, perhaps, we'll see if there is a bigger selloff perhaps in technology shares because you do get a more significant spike in interest rates. That might be an opportunity, simply because for the long term outlook for earnings, for technology, I think everyone appreciates that's still very good. There's just probably a bit more concerned right now about valuations. Hence, if you get that opportunity to pick up some of those stocks at cheaper prices, that would be good. But we don't think we're quite there yet.

ZACK GUZMAN: All right, let's drive down into where you like value plays the best here. I mean, we've been talking a lot about energy catching a nice bid recently. We've been talking about small caps potentially maybe bottoming there, if you believe a rally could come. I mean, where are you looking at the best upside here in the short term?

DANIEL MORRIS: Well like I said, our overweights besides value actually are in European small caps. I mean, if we think about the global dynamic in terms of the reopening, a lot of that you've got to assume by now is certainly priced into the US, probably questions rising about either how much of the infrastructure packages will actually get passed, how are they going to be financed.

So I think there's, if anything, more uncertainty there, whereas you would anticipate in Europe, over the coming months, not only are we going to see higher vaccination rates, but also the money that was approved last year for the next generation EU program is really only now starting to be paid out. So that fiscal stimulus is actually going to be hitting Europe right now. And as has been the case for years, valuation is more attractive in Europe. So for now, our emphasis is on the US and Europe currently on small caps, but thinking about how that shift in momentum could take place over the course of the summer, as you see more upside potentially for Europe versus the US.