HSBC Private Banking and Wealth Management Global Chief Investment Officer Willem Sels joins Yahoo Finance Live to discuss market performance, economic uncertainty, investor sentiment, the consumer environment, and the outlook for the energy crisis.
- Welcome back, everyone. US futures pointing lower, as investors remain uneasy over the road ahead for the economy. Joining us now for more on current market expectations, we've got Willem Sels, who is the HSBC Private Banking and Wealth Management Global Chief Investment Officer. Willem, great to have you here with us this morning.
First and foremost, just help us break down and give us some perspective into how you're thinking about not just the next moves that the Fed may make, but even the economic data that the markets have been trying to digest as they prepare for any policy decision that is still forthcoming.
WILLEM SELS: Yeah, so I think what the market is assuming here is that the Fed will become less hawkish and, at the same time, that we will escape a recession, certainly in the US, but even I think the market is hoping that won't happen in Europe or China.
I think what you usually see after a fall in equity markets, like we have seen such a bear market, is a bit of a bounce but then a consolidation. I think the market is jumping the gun on the Fed stopping with its interest rate hikes too early. And the rate cuts that they foresee in 2023, we don't think they will happen. So that's one tailwind that people are overexaggerating.
And then secondly, on the economy, the jury is still out. But there, we do think that the US will actually be relatively resilient relative to the rest of the market. So we're overweight on US stocks, but underweight in Europe and neutral in China.
BRIAN SOZZI: Willem, we think the market's just too-- just concerned about growth in this country. Just looking at this quarter from Walmart, they're actually telling us that their sales accelerated towards the back half of the quarter. In a recessionary environment, that's just not happening.
WILLEM SELS: Yeah, so the first and the second quarter of negative growth, according to the GDP figures, we don't see that as a good indicator of a recession. We don't think we are in one because, indeed, the labor market is too strong for that to have a recession already. And that's in part what it's showing, those retail figures.
Now, every retailer is somewhat different. Those with a strong market position are better positioned to protect their margins, which is a huge-- a hugely important element of where your stock is going to be trading. Because you need to look at margins, number one. Then, sales themselves are actually reasonably well supported by that spending and by the fact that sales equals quantity times price. So when prices go up, that actually supports sales.
What we don't think is that the multiples-- i.e. the price earnings valuation multiples-- that those will expand. So you're very much dependent on the margins to pick the winners from the losers in the retail sector.
JULIE HYMAN: So, Willem, you were just talking about the higher prices have been a boon, in some cases, to consumer-facing companies. Do you think that we have passed the peak of price acceleration, price gain acceleration? And is that eventually going to be a problem for some of these companies if demand is going to fall off at the same time that perhaps prices stop going up at the same rate?
WILLEM SELS: I think it will help them, ultimately. So if we are seeing already a decline in what we call PPI-- so the Producer Price Index, which is mainly the input for a lot of sectors that's in-- for industrials and, to some extent as well, for those retailers-- that's already falling. Obviously, CPI, which is the output prices, the things that we ultimately pay, those will start to fall as well.
But what is happening, but at a less quick speed-- so that difference is, in some respects, the margins, or correlated to the margins. The other element is that wage growth is still quite high. And in our view, that wage growth will be relatively sticky.
So if wage growth continues at the current level but CPI comes down, then actually the consumer will start to feel better. We're probably around the point of maximum pain for the consumer. It will take some time before they feel better. But from an economist perspective, you would start to see a slight improvement in the quarters ahead.
- Where are you advising clients to position themselves, then, at this time, even if the consumer environment should improve as a result of whether you want to cite prices, whether that's gas or some of the other kind of cost mechanisms that companies are, themselves, having to put in front of consumers right now?
WILLEM SELS: So first and foremost, the geographical allocation. So the US in favor with the overweight. Europe is still very vulnerable to that energy crisis, especially as we go into the winter. And then in China, you don't yet see the pickup in economic data.
So allocate to the US. Then, secondly, allocate really to those companies with that margin power. As I said, margin is the most important differentiator, more than pricing, multiple expansion, or sales growth. So dominant position or strong positions to protect that margin.
And then second-- and then thirdly, I would, from a sector perspective, balance the cyclicals with a defensive-- maybe a slightly defensive tilt because, over the last few weeks, the markets have gone and rallied too far in terms of really expecting that soft landing. The defensives were very expensive. Now, they start to be somewhat cheap in our view.
And then with regard to growth versus value stocks, that will be influenced by the interest rate outlook in particular. So the hopes that the Fed will stop much earlier than previously feared, that has helped technology stocks.
We don't think that that outperformance will continue. And so we'll also try to balance there. Typically, our clients are always overweight on technology because those are the things that they can get excited about. We try to get them to balance that with value stocks.
BRIAN SOZZI: Well, it's good to hear we have moved beyond the point of maximum pain, Willem. Never good to be in that period. We'll leave it there. Willem Sels, HSBC Private Banking and Wealth Management Global Chief Investment Officer. We'll talk to you soon.