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‘Q4 earnings are all about large-cap tech:’ Investment strategist

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Yahoo Finance’s Alexis Christoforous and Mona Mahajan of Allianz Global Investors discuss earnings as major companies report this week.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to get back to the markets now and bring in Mona Mahajan. She is with Allianz Global Investors. She's their investment strategist. Mona, good to see you again. Thanks for being with us. As you just heard, a very busy week for earnings. We're going to hear from Apple, Facebook, and Tesla tomorrow. What do you make of earnings season so far? And have there been any surprises for you?

MONA MAHAJAN: Yeah, you know, it's interesting. Q4 earnings were really all about large cap tech outperforming. And we're certainly seeing that come through in the numbers. So keep in mind, over the last quarter or so, really since September 30th of last year, we've seen this rotation into the more value cyclical-oriented sectors, areas like energy, financials, industrials, while large cap tech and tech and discretionary broadly sat on the sidelines, had a little bit of sideways movement or even sold off a bit.

Interestingly, what we've been seeing over the last week or so, really since earnings season kicked off, is that now we're seeing a reversal of that rotation. Technology has once again come to the forefront and is outperforming a bit. Broadly speaking, we continue to feel like this year, earnings broadly will be quite strong. And a lot of that is back half loaded. So the S&P is expected to be up, S&P earnings up 22% year on year.

And generally, the backdrop that we're looking at-- strong earnings growth, strong economic growth, stimulus added to the system, and the Fed on the sidelines in terms of rates-- that's a pretty good backdrop overall. Generally, if we do get any periods of consolidation or further rotation out of the value cyclical sector, we'd say that investors should really take that as a tactical opportunity to make sure they have layered in still some of that value cyclical exposure, small cap exposure, non-US exposure. We think all of that continues to have legs through this year at least.

ALEXIS CHRISTOFOROUS: Mona, you mentioned the Fed there. They're kicking off their two-day meeting today. If inflation winds up breaching the Fed's 2% target, even if that means it happens much later this year or into 2022, do you think the Fed will see it through and raise interest rates as a result, or is this economy still too fragile to take that on?

MONA MAHAJAN: Yeah, it's a great question. And I think one of the key risks to this bull market is the fact there is the potential for inflationary pressures to rise, particularly towards the back half of this year, when we do get that perfect storm of hopefully re-accelerating growth, stimulus, and ongoing Fed support.

But keep in mind the Fed has told us explicitly that it is willing to tolerate inflation above 2% for some time. They're calling it average inflation targeting. Over the last 10 years, inflation has remained pretty much below the 2% core PC target by the Fed. And it's breached that a handful of times, but generally well below the 2% target for much of the last 10 years.

So they're willing to tolerate higher than 2% inflation for some time. They haven't specified that time period. But if we get spiking higher inflation or a long extended period, call it 6 to 12 months of inflation above 2%, could the Fed change its accommodative tune? Yes, we think so.

And keep in mind, it's not that they would take-- even have to take any action. Even if they change their tone or their communication around what they're thinking about in terms of normalizing rates, starting to taper the balance sheet, et cetera, that alone could spark a market reaction. So something we're mindful of and watching, but probably not till the back half of this year at the very earliest.

ALEXIS CHRISTOFOROUS: And I'm sure this is one you're fielding from clients. What does the Biden administration mean for the markets? And which sectors may stand to benefit the most?

MONA MAHAJAN: Absolutely. Keep in mind, we had a couple of interesting surprises early on in 2021, including those two Georgia Senate runoff races, which both went Democratic. So we're now in a position where we have, of course, a new Biden-Harris administration, but also a Congress that is a Democratic Congress, albeit by a very slim margin.

So, on the margin or incrementally, this could mean more stimulus. We're already seeing that. The Biden administration has come out with a very strong or very large package of $1.9 trillion. We do think, ultimately, that gets slimmed down. But we do get something over the first 100 days of their administration, probably closer to the $1 trillion range.

Similarly, we expect an infrastructure package to be passed and, of course, executive actions around areas like clean energy. Overall, the sectors that we think do benefit, we continue to like the infrastructure and clean energy names. We also like areas of technology that the Biden administration has particularly noted, 5G and broadband, cybersecurity, parts of AI and robotics.

And then, of course, keep in mind what we said earlier. All of this stimulus focus on the pandemic and vaccine rollout and the Fed on the sidelines all is supportive of that value rotation. And so, that's why any opportunities you get to layer in cyclicality, we think is a good one. Non-US assets are included in that as well. We think that stands to benefit for some time through 2021 at least.

ALEXIS CHRISTOFOROUS: Yeah, speaking of non-US assets, you're talking about stimulus coming in some form, maybe not that $1.9 trillion. But if and when we get it, that could put some pressure on the US dollar. Where would you see opportunities with that environment?

MONA MAHAJAN: Yeah, absolutely. You know, the US dollar has actually been quite soft, really since that peak back in March of 2020. We've seen the DXY index fall about 12%. Could we see a period of a little bit of a rebound? Absolutely. But we think generally there will be downward pressure, especially if we get additional stimulus, if rates continue to remain low, et cetera. and if global growth rebounds as well, the dollar won't be as much of a flight to safety asset.

So in that kind of backdrop, non-US assets do tend to benefit. And so, in particular, we're looking at emerging market assets. And again, within emerging markets, we'd be selective-- areas that are not as impacted by the COVID crisis, areas exposed to China and North Asia in particular. We'd also consider, at least for a trade, selectively, parts of Europe that we do think have interesting value exposure. UK assets, for example, may be interesting, especially now that part of Brexit is behind us.

But of course, we're watching virus trends closely. And right now, Europe is under some scrutiny around the virus. So we'd be cautious there. But certainly, parts of EM, China, and North Asia all attractive. Keep in mind last year, the US was the flight to safety asset class, both from equities and bonds. And so, this year, we think that could broaden out a little bit as well. The US will continue to participate, but maybe alongside some other non-US assets as well.

ALEXIS CHRISTOFOROUS: All right, Mona Mahajan of Allianz Global Investors, always good to get your insights. Thank you.

MONA MAHAJAN: Great, thank you.