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How the 'rise of the retail investor' is impacting hedge funds

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Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss the market action with Saira Malik, Nuveen Head of Global Equities.

Video Transcript

MYLES UDLAND: Let's keep our attention on the markets, talk a bit more about everything that has been going on of late and what to expect for the rest of the year. Joining us now to talk about all that is Saira Malik. She's the Head of Global Equities over at Nuveen. Saira, great to speak with you this morning. So we have to begin by just from your seat and when you're looking at institutional allocations, how investors are thinking about the markets over the longer term.

What does a period like this where certainly you are getting questions about, what do I do about all this craziness and these individual names? How does it change, if at all, your thought process? And does it make you think anything different about the market's structure and kind of animal spirits than you guys were thinking as we came into the year?

SAIRA MALIK: What we're seeing is the rise of the retail investor. They're becoming more important as the easy access to trading applications, zero commissions, and social media. And this is having a knock on effect, particularly on hedge funds, which are being forced to de-risk because of this. And that's what's impacting the broader market. We saw more of that yesterday. And this is happening during a period where we're already worried about valuations and new strains of the virus.

For us, if you take a bigger picture look and take a step back, there's a vaccine right around the corner. Also, stimulus is in place. And so our view is that 2021, longer term, will still be a year where earnings growth that drove markets higher. It'll be a bit more back end loaded. So this volatility for us is something we're watching, but more likely to cause us to look for buying opportunities in some of those larger, more liquid companies that the hedge funds are causing to have downside because they're de-risking. And that's basically what we've been focusing on, as well as watching what's going on on the more of the retail investing side and how that's impacting the markets.

BRIAN SOZZI: Saira, how hard is it to stay focused on fundamentals in this environment?

SAIRA MALIK: We're always focused on fundamentals. And that's what you want to keep looking at. But obviously, a lot of volatility here. And that's going to have impact on portfolios, on companies that are in the benchmark, and how quickly that they're moving. So it's basically, we're looking at both sides of it. We want to focus on fundamentals and what are the true valuations of these companies that are moving very quickly, but also need to keep an eye on what else is going on in the market and how that's going to impact our portfolios.

But for us, it's continuing to do your homework and looking at, as I mentioned, these broad trends in the market, which as early as next week, we could get very good news on the J&J vaccine. And that could move the market back to more of a longer term earnings related trade. You talked a little bit earlier about inflation. We do see some inflation bubbling up this year. We think that that could lead to small caps performing well again, also cyclicals.

So we do you think over time, the market will focus more and more on the broader underlying trends that are going on, and really should continue to move us back into the reopening and some of these other areas of market that we like, like small cap, cyclicals, and even emerging markets.

JULIE HYMAN: So that's sort of the so-called reflation trade that Brian was just talking about a few minutes ago, Saira. And I come back to a question that I've had over the past several weeks as we have not yet really seen that reflation trade materialize, which is, if the market is a discounting mechanism of between 6 and 12 months, let's say, and people are expecting the second half of the year to have reopenings because of the vaccine, et cetera, why haven't we yet seen that reflation trade come into play?

And if we haven't, what's going to be the trigger? Is it going to be the results of the J&J vaccine? Is it going to be maybe an eventual passage of another tranche of coronavirus aid? What's going to trigger it?

SAIRA MALIK: We expect to see some inflation pick up as the economy reopens. So trigger number one is an economic reopening. We need more vaccines rolled out. Unfortunately, they were rolled out slower than we expected, starting in late December. And also stimulus, that as we get another stimulus package in place, topping off of those stimulus checks, perhaps an infrastructure package in the summer. All of that should lead to that inflation. So it's an expectation.

And you're right that the market is going to start pricing that in at some point. We do need to keep in mind, though, that there are lids on inflation. So we're not concerned yet about a taper tantrum and the Fed starting to pull back. But definitely as inflation bubbles up, that could become a higher risk. But we need to keep in mind, operating rates are below normal. Also, wage inflation is low and that's usually a big factor for what drives inflation higher.

And we also have negative trends in demographics and productivity. All of that will keep a lid on inflation. What we're looking at is, what do you want to own, though, if we think about inflation? Because market timing is a loser's game. So it's going to be hard to time your way around a taper tantrum. So which companies are more exposed to gradually increasing inflation? These are financials, industrials, smaller cap companies. And also, look outside of the US, because a reflation trade is positive for areas like emerging markets, where you're going to get more bang for your buck.

BRIAN SOZZI: Yeah, let's stay on emerging markets, Saira. What emerging markets do you like? You're looking at some of the earnings reports we received over the past week. And it looks like China seems to still be undergoing its recovery, but that's maybe the only country. India is under pressure. Brazil is under pressure. Is it just China and that's about it?

SAIRA MALIK: China was the strongest GDP country in the world last year. And we expect them to continue to do well. And actually, valuations in China aren't that expensive. So we're still finding pockets of China which are interesting, such as Macau Gaming, where people will go back and resume gaming and gambling as the world continues to open up. We also do like those laggards in emerging markets.

So these are areas like Brazil, which was one of the worst performing emerging market countries going into the pandemic. We think it'll have a nice catch up trade and have a nice reform story going forward. Mexico is another area that we like. The US and Mexican relations should improve with the new administration. And then we like India, another area that exactly, as you said, was hit hard by the pandemic.

It has a nice consumption growth story going forward, which should be positive for India. Other areas that we're less interested in are Korea and Taiwan, where similar to China, you've seen very strong market performance over the last couple of years. And we think that Korea and Taiwan will be relative underperformers versus other areas like Mexico, Brazil, India, and China, because valuations in China are not that expensive.

MYLES UDLAND: All right, Saira Malik is the Head of Global Equities over at Nuveen. Saira, thank you so much for joining the program. Really great to get your thoughts this morning.

SAIRA MALIK: Thanks for having me.