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Equity markets disconnected from Fed, bond market: AlphasFuture Founder

AlphasFuture Founder Geetu Sharmu joins Yahoo Finance Live to discuss the Fed’s monetary policy report, a soft-landing scenario, inflation, and the expectations for the next FOMC meeting.

Video Transcript

RACHELLE AKUFFO: All right, well, let's look at how markets are reacting as the Fed reiterates its call for rapid rate rises and a reduction of securities holdings. Joining us to discuss is Geetu Sharma, AlphasFuture Founder and Investment Manager. Good to have you on the show, Geetu.

So, of course, a lot of Fed speak to digest. And we've seen in January, we had this rally. In February, a bit of a reality check-- where are we now in terms of the markets factoring in Fed speak and really being on the same page?

GEETU SHARMA: Hi. Thank you for having me. I think we are really seeing the market-- equity markets being disconnected with what the Fed is talking about and what we are seeing in the bond market. Effectively, the markets are undoing the decline we saw last year, even as interest rates have only gone up. And on so many measures, that fear-- if you look at the metrics for equity valuation relative to bond valuation, we find that equities are really looking unattractive on a relative basis.

If you look at 10-year yield giving us 4%, versus a dividend yield of 2% plus, that's not very attractive. And even on an equity risk premium basis, we see that equity risk premium is about 1.4% right now, which is the lowest accept-- lowest ever except for the dotcom bubble. And we clearly don't see the markets heading towards another bubble-like scenario. That's not where we want to be.

So I think the market is probably pricing a soft landing scenario and assuming-- or believing that economy is going to slow down, but not head into a recession, and the Fed is going to end its rate hiking cycle and probably go down pretty fast. Now, we have to see how the data plays out.

We've had a kind of resurgence in inflation in January. Let's see what the February numbers look like. And then let's see what the Fed actually delivers in the next meeting. I think that will determine the trajectory of the equity markets for the near-term.

RACHELLE AKUFFO: Because they certainly have seen some whiplash going back and forth to start off the year. But what about long-term? What are your views on some of these growth stocks?

GEETU SHARMA: I think-- so there is something very-- the growth stocks are definitely an attractive place to be if you think about especially the ones that are innovating and in the tech space. And we have a lot of megatrends, like investing in energy transition, or internet of things, electrification of everything-- all of these are exciting investment opportunities, but they don't come without risk.

And one of the ways we measure risk is what is the expected return on these stocks, even given the growth? Now, we are seeing a lot of these companies priced for very high growth rates over the next four or five years. And it's fair to assume that every company in the industry will not achieve that kind of growth rate. Somebody will falter and there'll be competitive activity. So if you price in all of that growth and you still don't see an upside, then you're only buying into the risk and not getting the yield for that.

And that does not make sense. If the growth-- and now if interest rates stay high, you definitely want a higher yield, otherwise you can get a risk-free 4%, 5% in bonds. So I think growth stocks-- for me, growth stocks are at risk. But we are looking at more the quality growth stocks that have high return businesses that can invest in growth, don't have to go into the markets to raise funds, and have the strength in the business model to sustain a difficult economic environment or competitive activity.

We're also looking at some of the quality value names, which look attractive given the interest rates, where they are, and, again, can sustain themselves in a more difficult macro environment.

RACHELLE AKUFFO: And, Geetu, when you look at where valuations are, we're at the tail end of earnings season here, we're seeing a lot of companies being a lot more strategic as they're keeping that eye on margins as well. What are your expectations-- obviously, still bracing for a lot of volatility as we don't know what's going to happen-- what's looking attractive to you? Where do you see opportunities in this sort of environment?

GEETU SHARMA: So we have-- I think the earnings for S&P 500 index have come down. But many companies have reported strong earnings and are not as bearish on the outlook as maybe how we thought about it coming into this year. And so what it highlights is the strength of the economy that we are also seeing in the inflation data, the labor market, the consumption patterns, retail sales.

We're seeing the US economy do well. And so the companies are able to pass on a lot of the cost inflation to the customers, get pricing power, and achieve higher revenue growth-- maybe some margin decline, but generally higher dollar profits. And so I think as long as we continue to see this economic strength, we will-- companies, especially the ones that have competitive advantages, they're going to continue to report strong numbers.

But given that the Fed is bent on tightening this economy and creating some kind of slack, I think the fact that earnings may be peaking and might head lower is definitely a chance. And then given that, if the valuations stay high and multiples stay high, then you're really not-- there's that risk of sudden decline in the markets, which currently clearly we're not pricing in.

RACHELLE AKUFFO: Indeed, especially as we look at the action that we're seeing today. Geetu Sharma, AlphasFuture Founder and Investment Manager, thank you for your time this morning.

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