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Bear market ‘still looks a bit wobbly’ amid economic weakness, strategist says

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HSBC Chief Multi-Asset Strategist Max Kettner joins Yahoo Finance Live to discuss the bear market in stocks, Big Tech earnings, probability of recession, and the expectations for the Fed’s upcoming meeting.

Video Transcript

- So sticking with the markets here, we welcome in Max Kettner, HSBC Chief Multi-Asset Strategist. Max, great to have you here with us this morning. Where do you stand in terms of high-yield credit and global equities at the moment? And what's impacting some of those ratings?

MAX KETTNER: Yeah, good morning, and thanks for having me. Look, I guess you guys had the discussion just now, right, is the bottom already in? I don't think so. I think overall when we look at risk assets, they still look a little bit choppy, right, and still looks a bit wobbly. And to me, this is rather a bear market rally that we are seeing because just the underlying fundamental data looks really pretty weak.

And one thing that we've got to bear in mind is that when I talk about underlying fundamental data, we as strategists, we as analysts, the one thing we love to do is looking at sort of leading indicators of leading indicators, right, so looking as far ahead in the future as we can possibly, possibly do. Now, the issue with that is that at some point, you've got to ask yourself, well, is the actual weakness, is that actually-- has that already come through?

And that's not really the case, right. So far, we've only seen the weakness and sort of those leading off the leading indicators come through. So we've got to wait for some actual weakness to come through first before we can really talk about being a bit more constructive.

And to your question on high yield versus equities, to us, really, the asset class that prices in least of this recession risk, least of this slowdown risk across risk assets, it's not EM. It's not equities. It's not European equities or US equities or tech. It's really specifically credit and, in particular, US high yield.

JULIE HYMAN: Max, to get back to sort of looking ahead, right, it seems like some market participants are already looking ahead to central bank easing, right, or at least pausing. Do you think that that's sort of a fool's game that folks are playing, or a risky game, at least, that people are playing right now?

MAX KETTNER: It's a pretty risky game, if you ask me. I guess the underlying assumption is basically, well, growth is pretty bad, right, but we don't care because the Fed and ECB and other major central banks won't have to hike as much then in the end, and that's really good. So therefore, things like high-multiple stocks, like the NASDAQ, they keep on rallying. You've shown that before, right, that chart about the rally of the NASDAQ in July. That's sort of the underlying assumption.

All of that works as long as the earnings are fine, as long as margins are fine, as long as growth is only really dipping for, like, one or two months, a super short, super, super short and shallow recession, then that works. If we get a little bit more weakness coming through, then actually, yeah, fine, you'll have the Fed cutting. You'll have, perhaps, the ECB stopping to hike earlier than people think.

But that will be all around for the wrong reasons. It will be because, actually, there is a full-blown recession coming then, and not because inflation has already sort of magically gone down to 2%, and therefore everyone's already happy. That seems, like you said at the beginning, a very risky game, and I'm not particularly willing to play it.

BRIAN SOZZI: Max, you wrote one of your recent notes that we could see a severe slowdown in the second half of the year. Frame that for us. How severe?

MAX KETTNER: Well, look, you were talking earlier about the threat of a technical recession. And I guess once we get those GDP data out this week, you're probably going to ask every single guest whether that is a recession or not. In my mind, my recession definition is probably a bit different from an economist or other strategists.

To me, what always counts from a market perspective is, what was our initial, our original, expectations? What did we initially expect when we opened some trades? And frankly, six or seven months ago, when we look at all the year-ahead outlooks for 2022, what was the expectation? The expectation was inflation is going to be coming down, right. Inflation is going to be transitory.

The Fed and ECB, they're going to be very, very slowly tightening. And then we get the consumer shifting away from goods to services, and that's all going to be great. And then we're going to have Goldilocks, and everyone's going to be happy. I'm not particularly sure that's how it panned out, right. We've gone-- we've gone from talking about Goldilocks six, seven months ago to the real threat about a recession. And that, to me, is the really, really crucial thing.

Now, I think the worst of cases, what we could have is that so far what we've had is sort of an inventory drawdown. That was dragging down GDP growth in the US, in particular. Now the manufacturing sector comes through, and then the worst of things that could really happen is that we get, really, the consumer reacting lost, right. So not a typical recession where you would sort of see everything happening at the same time, but sort of a staggered recession, which is first inventories getting drawn down, then the manufacturing, the industrial sector suffering, and then the consumer suffering.

I'm not as bearish as that, but that could be sort of the worst situation because then we'll be talking about the same stuff in the next 12 months still. I'm not as bearish as that. I do think there is better-- there's some better times ahead from sort of end of Q3, Q4. But in terms of the slowdown, the big, big problem that we get now is that it's becoming much more broad based. It's not just inventories anymore. It's not just manufacturing. But we are starting to see some cracks also in the consumer.

- OK. So Max, we've set this very rosy picture. So where can people put their money to work?

MAX KETTNER: Well, I would love to wear those rosy glasses as well. I'm not particularly sure they would suit me as a bearish guy as I am right now. I guess where you could put your money right now is things like a high beta versus minimum volatility stocks. Some min vol stocks have actually still not outperformed enough given the slowdown that we've seen so far.

Other things, as well, like high dividend strategies, right, high income strategies, those sorts of things that actually have outperformed over the last six, seven months have to retrace a little bit. Those typically lower beta, lower volatility strategies really still have value at the moment. In terms of like, let's say, from a regional perspective, I do think emerging markets actually start to look attractive because when you look at our measures of dollar positioning, that's already very, very long on aggregate.

And on top of that, when we look at China's credit cycle, that's shown very definitive signs of bottoming out a couple of months ago, and that could really turn into, actually, a tailwind from the end of Q3 and beginning of Q4. So emerging market asset classes, both on the fixed income side, also on the equity side, compared to developed markets look pretty decent value to me at the moment.

BRIAN SOZZI: Max, before we let you go, if one is still holding on for dear life on these tech stocks, what do you do? Because we're looking at a series of rate hikes going into year end, and that normally is not a good backdrop for tech.

MAX KETTNER: Yeah. I guess, look, the big, big bet on tech is basically that real rates and longer dated real rates in the US are going to stay pretty benign and pretty low, right. And that's our base case as well. So that actually means the environment that we have at the moment is pretty conducive for growth away from value, right, away from those sort of shorter duration financials, and so on and so on, so more towards the growth kind of stuff.

Because bear in mind, yes, tech, the earnings season might bring a couple of negative surprises, absolutely. But I'd be bias on those steps because at the end of the day, it's really about the valuation there. And the valuation there is mainly really a function of what is happening with longer dated real rates. And that, as we know, is a function of Fed policy. If the Fed can't really raise rates that much further, then actually tech looks like a pretty decent place to hide out in conjunction with the wider growth-- growth universe.

BRIAN SOZZI: Max Kettner, HSBC Chief Multi-Asset Strategist. Good to see you this morning. Have a good week.