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Expect semiconductors, hardware to see great demand: strategist

Yahoo Finance’s Akiko Fujita and Zack Guzman discuss today’s market action and outlook with Matt Miskin, John Hancock Investment Management Co-Chief Investment Strategist.

Video Transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Matt Miskin, John Hancock Investment Management co-chief investment strategist. Matt, we caught you on a good day here to try and make sense of all the moves. What do you see right now in terms of the big sell off in equities when you pair that with the bond moves that we've seen?

MATT MISKIN: Yeah, the dollar's strengthening. And the Treasury yield curve is flattening. Both of those are disinflationary developments, meaning they are likely signaling less inflation. And if you even think about before the Fed meeting, the 30-year Treasury yield had already started to roll over. You had TIPS break-evens rolling over. You had some of the commodities rolling over.

And so that really accelerated when the Fed came out and said that they were forecasting a rate in 2023. So the cycle is aging quickly, in our view. You need to think about transitioning positioning away from those reflation assets to higher-quality assets as we look into the back half of 2021.

AKIKO FUJITA: Matt, how much of this is the market really just trying to process everything that's happened since Wednesday? Is it a bit of a knee-jerk reaction? Or how much of it do you think really signals which direction the market is now headed in as a result of the Fed's statement?

MATT MISKIN: Yeah. I mean, the Fed saying this, you can't take it back. And in essence, it's putting a stake in the ground on the potential tightening cycle of this economic and business cycle. And to us, it is something that is more long-standing and something that is going to formulate this cycle. The Fed kills every cycle.

Last cycle, it was the pandemic. But the Federal Reserve had already been raising rates before that. They were trying to cut it before it. Typical, traditional cycles, the Fed dictates the length of the cycle. And that they are signaling rate hikes in 2023 suggests this cycle will be smaller or shorter than last one.

And you need to think about positioning along the cycle. We believe we're moving to mid-cycle right now. And early cycle is now behind us.

AKIKO FUJITA: So what does that positioning look like?

MATT MISKIN: Yeah. So it's a higher-quality bias to your equities. So early cycle, low-quality, lower-sized stocks or small cap typically do the best. Mid-cycle, there's more of a gravitational pull to higher-quality businesses with good margins, good ROE, good balance sheets. And we would really position there.

If you look at around the world, the most quality stocks are actually found in the United States. So that brings us more into the US. And technology is the biggest sector in the MSCI Quality Index. That's a sector that was really out of favor to start this year. We think it's going to actually gain traction in the back half.

AKIKO FUJITA: It's interesting because you're right. I mean, we've heard so much about sort of the growth stocks being out of favor here. But it does feel like we've seen a bit of a rotation there. Any particular spaces within the tech sector that you're looking at, whether it's on the cloud side, the chip side, or in the bigger tech names?

MATT MISKIN: Yeah. I mean, we still think semiconductors are going to see great demand. Obviously, there's a shortage of them right now. That's not a bad place to be in terms of pulling through demand further. So semiconductors, hardware.

What we see is that business capex is still going to be heavy in technology. We understand that there's going to be more traditional capex, property, plant, and equipment, industrial-type. But tech capex is going to stay strong too. I mean, there is stickiness to this pandemic.

In the lives we're living, we think technology is going to be a big part of business programs and how businesses operate in this new environment. And we still think tech has a lot more in terms of all that capital that's available at businesses. It's going to be earmarked to tech. And we think that's going to help earnings growth into 2022.

AKIKO FUJITA: Now, what about opportunities outside of the US? We've heard a lot about sort of the pickup in recovery over in Europe. Is that an area that you're looking to increase exposure? Or Are you really just looking overweight US equities, just given some of the moves that we've seen.

MATT MISKIN: Yeah. We would be selective in Europe. European indices, by their construction, have a large allocation of financials and deep cyclicals, think energy and materials. We would underweight financials, energy, materials. So that puts you at a modest underweight in Europe in general.

But what we like is consumer discretionary and industrials. These are businesses that are seeing nice earnings recovery. And they're secular growth businesses in Europe. These are businesses that have been the best operating of the whole European continent and, really, in terms of the region. Consumer discretionary and industrials, we think, are secular growth companies cyclical upside, best pockets. That's more growth and quality in Europe. So that's where we would be instead of value in the European allocations.

AKIKO FUJITA: Matt Miskin, some good takeaways there. Good to talk to you, John Hancock Investment Management co-chief investment strategist as well.