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Everything ‘falling into place’ for U.S. and global growth: analyst

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Krishna Memani, chief investment officer at Lafayette College, joins Yahoo Finance Live to discuss his growth outlook and the biggest risks in the markets for 2021.

Video Transcript

MYLES UDLAND: Let's stay on the markets right now and talk a bit about the setup today and sort of how the lay of the land is looking right now. Krishna Memani joins us. He is the chief investment officer over at Lafayette College. Krishna, it's great to speak with you once again. I don't think we've spoken since you took the role at Lafayette, so congratulations on the new gig.

I'd just like to start with kind of your view on the markets right now and what we've seen in the last couple of months, really since the election. That reflation trade, however we want to call it, has kind of been rip-roaring. We see yields continuing to back up. What stands out to you right now in this market, both as attractive opportunities and big risks?

KRISHNA MEMANI: So, you know, I think calling it the reflation trade I think may be slightly premature. What it is is basically an economic support trade more than anything else. Everything is falling in place for the growth outlook, not just in the US, but on a global basis.

You know, you have the infection rates going down. You have vaccines getting rolled out. You have stimulus everywhere. Economic activity in India and China have picked up. So I think, from a growth perspective, everything is coming together, and 2021 would certainly be a really good year for growth. And as a consequence, as long as the Fed maintains its current policy stance, which it has told us that they will till 2023, I think 2021 should be a really good year.

Clearly, rates have been going up, and rates have been going up because of inflation expectations going up far more than real rates going up. And that's to be expected because we are talking about a cyclical rebound. The real question for the markets is-- are twofold. One, does this growth outlook remain as robust in 2022 as it is in 2021? And my point there would be that it probably doesn't, and growth is going to slow down in 2022 meaningfully. And therefore, inflation expectations, the other leg, will probably come back as well.

I don't-- we were headed to, let's say, sub-1% 10-year rates even before the pandemic because of slowing growth in the US because of structural issues. The stimulus certainly has helped supplant people's incomes in a pandemic, but it hasn't changed the secular outlook. So I think things are still looking quite good. Rates probably rise for a little bit more but not too much but by the end of the year, start coming down meaningfully.

JULIE HYMAN: Krishna, it's Julie. It's great to see you. I'm curious about risk appetite here because we talk to a lot of institutional investors here about the appetite and the questions that they get about things like cryptocurrencies, meme stocks, all of-- SPACs, all of the sort of frothy areas that we have seen in the market. Working at, now, a different kind of institution-- a college-- I'm curious how you're thinking about those type of assets, especially at a time when the sort of fundamental finances of many higher education institutions are challenged.

KRISHNA MEMANI: Well, certainly. I think the COVID episode really hasn't been good for higher educational institutions because of loss of revenue and additional expenses that they face. Having said that, you know, for us, the endowments and pockets of money that I manage, you know, the near-term outlook is important. But what we are focused on is, how are we going to generate the 7%, 8% type returns that the institution needs over the long term? And from that perspective, things really haven't changed that much. That is, with bond rates at 1%, the likelihood that you'll be able to generate those kinds of returns out of bonds or anything similar to bonds is nearly impossible. Just the math doesn't work.

So we basically have to take the equity risk. And I think the equalization of the portfolios has been happening for quite some time, and it probably will remain that way. You know, the only way you can meet that return targets-- and that's true of not just endowments, but institutional investors in general-- is by taking more equity risk. For us, we have been a decent investor in public equities. What we are focused on is increasing our private equity allocation, which is substantially less than our peers.

JULIE HYMAN: Interesting. Right, that has been a trend in recent years among endowments. And what about things like cryptocurrencies? I mean, is that stuff that still is not in your mandate that you're able to invest in? That-- they're-- certainly, the returns have been there.

KRISHNA MEMANI: Well, yes, so you know, we haven't really invested in cryptocurrency. And like most of our kind of peers, we will-- you know, we will consider it. Endowments typically are at the forefront of looking at alternative investments.

Having said that, I think for cryptocurrencies to become an important part of an allocation for us and our peers, again, it would have to have three things happen to it. It is that it has to be proven that it is a store of value. The volatility has to come down. And correlations relative to other asset classes has to go down as well. I don't think-- even if we dabble in it in the future, I don't think all of those three conditions are met anytime soon. So it's really going to be more of trying things out, rather than making it a large part of our allocation.

You know, what people are kind of thinking about crypto these days is more about FOMO than it really is about something they have just found out about cryptocurrency. You know, they-- if you look at the correlation of crypto stocks and tech stocks, you know, I don't think it's really that different. It's basically in a liquidity-driven trade just as much as anything else.

BRIAN SOZZI: Krishna, how long do you think the market could continue to go up at the same time 10-year yields are on the climb?

KRISHNA MEMANI: Well, so that's really a very interesting question because from the market's perspective, what is more important is a real yield far more than nominal yield. So as long as real yields remain kind of stable-- they have gone up some, but nothing like the 10-year rates themselves-- I think we will be OK. So I would say that if real yields rise meaningfully, then that would be a problem for the market. If rates rise substantially so that people start anticipating the Fed bringing the 2023 rate rise environment forward, I think that would be a challenge as well.

I don't expect that. I think, by 2022, things will start slowing down from a growth perspective. And therefore, inflation expectations will come down as well, and everything would be hunky dory. At least that's what my outlook is today.

MYLES UDLAND: All right, well, if you've got a hammer, you've got a nail. So I guess Fed watchers are always looking for the next rate hike, and I know that we'll be discussing all that stuff coming up ahead. Krishna Memani is the chief investment officer at Lafayette College. Christian, great to hear from you and I know we'll talk soon.