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Market shouldn’t signal a 'huge downside' in latter half of 2021: CIO

Rhys Williams, Spouting Rock Asset Management Chief Investment Officer joins Yahoo Finance Live to break down the demand for investing in semiconductors and share why China is a good proxy for what markets might look like six months from now, as coronavirus cases become more controlled.

Video Transcript

ZACK GUZMAN: Well, let's kick things off with that warning from China. The economy, a lot of investors have been looking at the economic models out of China for their return to normal and projecting that back here stateside. But from the perspective of China's top banking regulator, he says the stock rallies in the US and Europe markets have moved beyond what you'd expect from their underlying economies with the correction destined to come sooner or later.

So let's bring in our next guest on that. Spouting Rock Asset Management Chief Investment Officer Rhys Williams joins us now. Rhys, appreciate you taking the time. I suppose last week's selloff maybe indicated the speed at which investors might be willing to take chips off the table. But that seemed short lived. So what do you make of the warning out of China and what we can take away from that country's recovery for what lies ahead here in the US?

RHYS WILLIAMS: Well, I think in terms of China itself, one, I guess in terms of regulators, regulators are never that great on timing. I've never seen a US regulator get 100% right. We all remember the irrational exuberance remark from Alan Greenspan in the mid '90s and we went on to have a very strong two or three years after that. So I think getting the timing right on predicting a top in a market is very difficult for for anybody, including a regulator.

As to the kind of overall view of where the markets are ahead of themselves, there clearly is a recovery mode going on in terms of expectations. And so therefore, based on this quarter's earnings, yes, the market is ahead of itself. I think based on what the market's likely do in the second half of the year and in 2022, it's probably much more fairly valued.

And there's some really undervalued stocks and there's some overvalued stocks. But I don't see the overall market, especially if you think about some of these bigger secular growers, the big FANG stocks, are relatively modestly valued relative to their earnings. So I don't see a huge downside either in the market at this point.

AKIKO FUJITA: Rhys, I want to get to some of the picks, some of the areas that you think are particularly attractive right now. And you've highlighted semiconductors. This is, of course, an area we've been talking about a lot because of the global chip shortage. You've talked about a global supercycle that can really sort of accelerate the momentum there. But I'm curious how much of the shortage we're seeing right now is likely to derail that momentum that you're talking about.

RHYS WILLIAMS: Well, I think as long as there's a shortage, that's good for the semiconductor manufacturers, because orders will stay strong. And especially as long as there's not a lot of double ordering, which has typically been the tops of previous semi cycles. So we think actually given some of the real big drivers that you have in terms of 5G, in terms of all of the auto and auto-related infotainment going on, there's just much more of a demand for semis, as well as, obviously, the secular trends towards cloud computing, which demands very intensive semiconductor computing power.

So I think some of these longer term trends over the next two to three years should lead to a fairly attractive return overall for semiconductors. Now, could there be corrections as these stocks have started to work over the last year? Absolutely. But I think corrections ought to be added to as opposed to subtracted to.

ZACK GUZMAN: Rhys, let's talk about the other side of your advice here too, because it is interesting to talk about the cyclicals that stand to gain a bit. And it's easy to say, OK, go ahead and invest on some of those names that are going to benefit from the reopening. But you specifically highlight kind of something that's overlooked here and some of those names that were beaten down, but may have had to fund survival or weathering the storm with either its share issuances or new debt.

You can think about with the cruise stocks as some prescient examples there. But which ones do you like to play? I know you have IMAX on this list. What companies are you looking at that maybe didn't have to go that route to weather the storm?

RHYS WILLIAMS: Well, IMAX I think is a good one, because if you look at both the airlines, which have had to issue so much stock and debt that actually their enterprise values, which is stock and debt combined, is higher than it was pre COVID, even though the stocks are still down a lot. But IMAX has had a really strong recent move. But if you look back 15, 16 months, the stock was $25. If you look back two, three years ago, the stock was $30. So the stock being at $21 is not a really extended five-year view of the stock.

And if you look specifically at China, which is the most advanced economy in the world right now in terms of has the least COVID effect, the best overall economy, and is the most normal, quote unquote, China movie demand was actually up 25% over the comparable period in 1999, which was, excuse me, 2019, which is the last period that was a normal period.

So we think IMAX is showing that people do want to go back to the movie theaters. We don't think that's a widely agreed with assumption. I think movie theaters are widely viewed as sort of the next Blockbuster. And our view is actually somewhat differentiated, that people when they feel safe, are going to really enjoy going back to the movie theater to get that big box, big blockbuster kind of entertainment.

ZACK GUZMAN: Yeah, and a lot of people, a lot of retail investors have been talking about AMC too. But they might overlook what could be there on the table in IMAX. But Rhys Williams, Spouting Rock Asset Management Chief Investment Officer, appreciate you coming on here to chat with us today.