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Five key themes for investors for Q2

Seema Shah, Principal Global Investors chief strategist, joins Yahoo Finance to discuss market outlook and economic recovery amid the pandemic.

Video Transcript

MYLES UDLAND: All right, let's stay on the markets and talk more about the picture for investors against that kind of backdrop. We think about what the next lever for growth is here. Seema Shah joins us now. She is the chief strategist over at Principal Global Advisors.

So, Seema, we just sort of kind of run through this morning's strong run of economic data. As you guys see the market today, how much of that has already been anticipated by the market, and what are the next growth drivers for investors to get excited about? Is it just this continuation of better than forecasted, better than expected data, whether it's on the economic side or the corporate side?

SEEMA SHAH: Hi. Yeah, it's such an important question at the moment. We're getting asked this all the time. Is it all priced in and is there anything left to go?

You know, we are expecting this economic recovery. It's only just starting to unfold firstly. So, there's still a long, long way to go and we are expecting some really strong numbers to start coming through for the coming months. I think the next stage to watch though is going to be earnings. We need to see the proof in the pudding with earnings season upon us.

This is the right time to be seeing the numbers that we're anticipating. So, we think that as our earnings numbers go through, showing that really positive picture, confirming that positive picture, then that's going to give that market an additional umph. But certainly, look, the rotation that we've already seen over the last couple of weeks, couple of months, has still got further to go, and really equity markets are in a very good position given this very strong economic backdrop.

BRIAN SOZZI: And Seema, you're still overweight equities, or still view them favorably. At what point do you-- do you see stock valuations are just too high? Do you think we're nearing that point?

SEEMA SHAH: No, we don't. You know, look, valuations have caused a really important indicator to watch, but it's mainly for the long-term. Things can continue to be expensive, become even more expensive, as long as you've got the right drivers behind you. And those right drivers are a strong growth outlook, which is absolutely what we're facing at the moment, and central banks that continue to be very supportive, which is what exactly what we're seeing from the Fed. So, until one of those two changes, really, we think the equity market can continue to perform pretty well.

MYLES UDLAND: And Seema, as we anticipate a period here of higher than expected inflation, you and I both know what the conversation is going to become as we get into the summer. How are you talking about that environment with clients who are saying, well, maybe the Fed's going to have to pull forward, maybe I should be looking at inflation hedges, though we have pretty much heard every economist up and down Wall Street say, this will be a transitory period of higher than normal inflation?

SEEMA SHAH: Yeah, and I think it's an acknowledgment that we are facing higher inflation, what we've seen over the last couple of decades. One side of it will be transitory, but there is going to be another side, which is a more persistent increase. But I think the key thing here is, it's going to be something which is still in line with what the Fed is telling us that they're looking for. So, still around that 2% area.

But the other thing is, is to really understand that the Fed has got a completely new reaction function without actually putting the labor market before what we're seeing for the inflation market. So, they want to see a really true inclusive improvement in the employment picture, and really, inflation isn't going to get in their way. So, from our perspective, we're still looking at a Fed, which is remaining very easy for the coming couple of years.

But on top of that, we have got slightly higher inflation, which investors do need to consider in their portfolios. And to also saying, look, start really considering some of those real assets, real estate. Those are the areas that will do well and things like value within equities, which does well in a more inflationary environment where you have that steepening yield curve. So, investors do need to be recognizing that inflation can have an impact on their portfolio.

BRIAN SOZZI: And Seema, if we've learned anything over the past decade with all this easy money, that is often a good setup for tech stocks. Do you still like the space?

SEEMA SHAH: We do, but we also acknowledge that this isn't the best environment. Certainly, nowhere close to what we've been enjoying for the last year. You have two things here, which is one is that the work from home trade is starting to fade, and as you said, with an inflation environment, you're going to have yields rising.

You have to look beyond that short-term though and start looking at the more secular story behind tech where you have very, very positive cash flows. So, you're looking at really strong companies where the earnings figures should continue to do well. So, to us, this is more of a secular trade. Certainly, not the returns that we saw last year, but still something to have an allocation to.

MYLES UDLAND: And then, Seema, finally, just in terms of geographic allocations here, US versus Europe versus emerging markets. How are you guys seeing that trade today, certainly as we see the progress of vaccine rollouts and the spread of the virus vary greatly by regional there?

SEEMA SHAH: Yeah, and the vaccine rollout is really giving us a very good sense of which-- which areas are going to be outperforming. At the moment though, we really like the US. Not only has it got the vaccine rollout really well underway, but also, of course, it's got the fiscal stimulus. It's really got the growth story down.

Europe, on the other hand, has really fallen behind. We have got some concerns that they're going to continue to fall behind, and they're reopening, and that economic recovery is just getting pushed further and further out. And lastly, emerging markets has been a really interesting story. In the last few weeks, we've seen it struggle, and I think there's four reasons for that, and some of them which are likely to continue.

One is that you're seeing rising inflationary pressures in a number of those markets. So, you're looking at tightening from central banks, which unfortunately is going to weigh on some of their growth outlooks. The second thing is the dollar. We've seen a stronger dollar rather than the weaker dollar, which as we know, it's never a good foundation for EM assets.

The third thing is COVID. COVID cases have got out of control in a number of these EM countries, which is a little bit different to what we were anticipating at the beginning of the year. And the final thing is China. We're seeing them pull back a little bit on the leverage, on the credit easing measures, which means that Southeast Asia, EM Asia, isn't getting the same kind of boost that they were enjoying over the last six, seven months.

This is it, but this is a tactical trade, right? Emerging markets will do well. But I think over the next few weeks, they will continue to struggle.

MYLES UDLAND: All right, Seema Shah, chief strategist at Principal Global Investors. Seema, really appreciate the time. Always good to chat. We'll talk soon.