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‘This market has plenty of room to rally’: Strategist

Elyse Ausenbaugh, global market strategist at J.P. Morgan Private Bank, joined Yahoo Finance Live to discuss the areas of the market she's watching heading into 2021.

Video Transcript

ADAM SHAPIRO: One thing investors are asking about is what to expect in the coming year. And wouldn't you know at JPM, JP Morgan's private bank outlook report is out. And to help us understand what some people should consider in 2021, we invite into the stream Elyse Ausenbaugh, who is the global market strategist at JP Morgan's private bank. Good to have you here.

ELYSE AUSENBAUGH: Thank you. Happy to be here.

ADAM SHAPIRO: One of the things I wanted to talk about with you is that you still believe, for instance, core bonds provide the most efficient way to dampen a volatility in portfolios. What does that look like in the real world? Because I would think a lot of people right now are afraid of bonds, given that you don't get any return, at least if you're go through government bonds.

ELYSE AUSENBAUGH: Sure, so the yield environment is absolutely challenging right now. And it's likely to persist, given our outlook that the Fed is going to maintain this super accommodative policy stance for the foreseeable future. As you said, we do think the core bonds can continue to offer some of that diversification benefit. But in order to augment yields, investors are going to have to make some tradeoffs.

So one of the tradeoffs they might consider making in order to complement that core bond exposure is moving a little bit further out on the risk spectrum and looking at areas of the market, like preferred securities or mortgage-backed securities or even high yield municipal fixed income, where we see yield enhancement opportunities. Alternatively, they might be able to make a tradeoff of liquidity. And to the extent that they're really seeking out some of those income generation characteristics, as well as portfolio diversification, we're really excited about investing in areas like real estate and infrastructure right now.

So I would just encourage investors to kind of think outside of the traditional core bond toolbox and complement some of those exposures with maybe more risky or less liquid positions.

JULIA LA ROCHE: How about from an equity perspective? What are the trends, at least that you're going to be paying attention to in 2021 and even beyond, and where specifically might you want to be invested?

ELYSE AUSENBAUGH: Sure, so I think one of the big trends for 2021 and certainly something that a lot of investors are focused on right now are equity valuations. Because there's really no denying that they are high relative to their own history, but I think we as investors kind of have to reconsider what might constitute expensive equity valuations. When we think about what's driven this 15% rally that we've seen year to date, it's really been defined by two things, one of which is, of course, that valuation expansion. And the second is the narrow leadership that's really kind of come from those companies that are able to operate in the digital sphere.

But going forward to 2021 and thinking about what's going to drive equity upside from here, we actually don't think that the market needs any further multiple expansion in order to generate low double digit returns. We think that the ongoing rally is really going to be driven by a broad-based earnings recovery. And it's that broadening out that could lift some of the still downtrodden companies in the S&P 500 higher. I mean, if you think about it, there are still 190 companies in the index that are down year to date. So we think this market has plenty of room to rally.

And in terms of how we're positioning, we're balancing some of those longer term secular growth exposures in areas like digital evolution, healthcare innovation, and sustainability with some of the more tactical opportunities we're seeing in areas like transports and materials, which should benefit as this recovery really starts to broaden out and find its legs.

ADAM SHAPIRO: You and the team may have already hit a home run because there was the news that the Trump administration may levy new tariffs on Vietnam. And you in the report talk about supply chains likely to shift, policy makers incentivizing perhaps more domestic production and onshoring. But as an investor, if I combine that with a weak dollar or the dollar continuing to weaken, wouldn't I want to look maybe more at emerging markets for those supply chain shifts, or am I mixing two things that are not related?

ELYSE AUSENBAUGH: No, I don't think you're mixing two things that are unrelated. I mean, in particular, for US investors, I think 2021 is going to be a year where you have to be really mindful of your currency exposure. Certainly, one of the side effects of this global healing process that we're already starting to see play out is a weaker dollar. And we think that that trend is going to continue in 2021. When you consider that the Fed is holding policy rates at 0, there's less uncertainty across the board. And this growth backdrop is improving.

So combine that with everything that's going on in terms of the international relations, and this weaker dollar outlook does bode really well for emerging markets. And it's one of the reasons why that category is one of our highest conviction ideas in 2021. A weaker dollar is effectively a form of financial condition easing, especially for those companies that might borrow in US dollars, but generate revenues in local currency terms. So it's gotten us really excited about investing in the space, particularly in the Asian markets that fall in that category.