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“For the 2021 markets it's going to be rotation,” UBS Private Wealth Management Managing Director

Rod von Lipsey, Managing Director, UBS Private Wealth Management joins the Yahoo Finance Live panel with the latest on the markets.

Video Transcript

ZACK GUZMAN: I want to shift over from the energy outlook there to the broader market in terms of what this event and the uncertainty we've seen play out in the markets now shifting over into a period of continued strength. That's proven out when we looked at one of the most closely watched surveys, the Bank of America Global Fund Manager survey, indicating that more than 90% of investors now believe the economy will be stronger in 2021, with a consensus building, if not already formed, around that V-shaped recovery.

So here to break down what to expect in the rest of 2021 ahead, we want to bring on our next guest here, Rod von Lipsey's managing director at UBS Private Wealth Management. He joins us now. Rod, Thanks for taking the time here. I mean, obviously, 2021 is already proving to be one of those years that potentially could set up to be very strong. When you look at that survey and you look at bullish sentiment right now, what do you make of where we're at market-wide?

ROD VON LIPSEY: Zack, that's a great question. And much last year was about location, whether it's location physically or location in the markets. As our real estate friends like to talk about, location is the key.

This year for the 2021 markets, it's going to be rotation, rotation, rotation, rotation. And that's what we're seeing. Today's markets, with all the indices reaching new highs, if we go and look at the international and emerging markets, we see a little bit more strength there. And that trend is what we think is going to continue this year.

So the big winners of last year, those big, mega cap tech stocks, those big S&P stocks, they've had a great run. But now we want to look at some of the little guys. We want to keep an eye on the emerging markets. We want to keep an eye on the small caps, the midcaps. So it's a rotation back into those cyclicals that we think is what the rest of 2021 has in store, Zack.

AKIKO FUJITA: What's actually driving that rotation, you think? It sounds like that there's two sides of this argument, one being that valuations have just run up so hot, especially in some tech names. But also there is the case of value being sort of a real growth opportunity as we continue to see more and more people get vaccinated and the expectation of the economy opening up in a meaningful way increases.

ROD VON LIPSEY: That's right, Akiko. I think that you've hit the two key points there. I'll start with the second one, which is that people are ready to get out. When they dig out from the snow in the South, Central, and the Midwest, when we get some better weather-- even Punxsutawney Phil a couple of weeks ago-- we want to get out. We want to get back into things, get back to business, back to our lives.

And so we think that some of that will benefit the consumer discretionary stocks. It will benefit those cyclicals that we've been talking about. In some of those staples in the durable goods which got us through, the defensives that got us through the COVID crisis, we're ready to start spending. We're ready to get back out. And so it's not just the valuations. But it's also a reflation of the economy and us getting ourselves back to being mobile and engaged.

ZACK GUZMAN: Yeah. And when you think about that rotation being a theme here, I'd be curious to get your take on maybe simplifying things a bit and in terms of your advice to investors out there and focusing on, maybe, some of those beaten down sectors, as you're saying, discretionary. We've also seen energy the standout here in 2021, by far, by about a two to one margin leading over the second best performing sector. Is that just because there's so much room to run in terms of where they were before and how bad things got, that it just kind of seems like a no-brainer? What's your stance on maybe simplifying things for investors now?

ROD VON LIPSEY: Well, think of it this way. When valuations have hit such great disparities, investing is about finding something that's going to appreciate more than the other. And so when we look at a big mega cap tech stock and ask, how much more will that appreciate, the answer is, we don't know, but it's a lot less than a beaten down energy stock or a beaten down value stock.

And so what you're seeing in energy is that, after an unbelievably bad string of energy performance when we stopped using fuel, when we stopped flying in airplanes, all of those things that really hit the energy industry on a global basis dramatically, those valuations really fell to the bottom. When we think about it, so it's how do we find somewhere to put money today where we have the most upside potential and the most upside opportunity?

Our UBS year in 2021 forecast, for example, for the S&P 500, about 4,100. That's pretty much in line with consensus. Well, that's 4% or 5% away from where we are today in February. So that means the rest of the year could be a grind. It's going to be an upward grind, but it could be a grind for those big cap stocks. But if we look at the energy sector and we look at the emerging markets where valuations are well below, well below their long term averages, that's where we think investors should be focusing right now.

AKIKO FUJITA: And Rod, away from the markets, there's been a lot of debate among economists around how significant this $1.9 trillion plan will be coming from Joe Biden if you're talking about stimulus and whether, in fact, it will be significantly inflationary. I know you're not necessarily an economist. But I'm wondering which side of the coin you stand on and whether, in fact, you're looking at your portfolio and potential adjustments on the expectation that things could run a little hot by the year end.

ROD VON LIPSEY: That's a really great question. And everyone's really debating with inflation. And so there are a lot of people who are on both sides of the argument with very, very strong views. So we look today at the 10-year Treasury at 1 and 1/4 percent. Our forecast for year end is we don't see the 10-year much above 1 and 1/2. That's about where it was this time last year.

But the short-term expectations for inflation, we think, are strongly greater than the longer-term expectations for inflation. And that's based on the fact that consumption is going to start to pick up. But there's still a lot of slack in the economy. And we think that's what the Fed chairman was trying to say last week in his comments, that the real unemployment-- and in certain segments of the population, we still have a lot of mobilisation to go. So there's still, again, some excess capacity. So I would say that the longer-term outlook for inflation is actually much more benign than the nearer-term aspect of inflation. I hope that answers your question.

ZACK GUZMAN: All right. No, that definitely answers it. You answered that one and more. With us today, Rod von Lipsey, managing director UBS Private Wealth Management. Appreciate you stopping by here to chat.