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Sectors investors should watch out for in 2021

Girard CIO Tim Chubb joins Yahoo Finance Live to discuss what sectors investors should watch as we head into 2021.

Video Transcript

JULIE HYMAN: Let's bring back in Tim Chubb from Girard. He's the CIO there. We were talking about the big picture a little bit earlier, Tim. I want to dig down into where you-- as an active manager, where you are seeing opportunities right now. I know you're looking to some of the software as a service plays, enterprise software, et cetera. That's a group that's already had a pretty good run this year. So what makes you think that we're going to continue to see some momentum?

TIM CHUBB: Yeah, I think it's a couple different things. You know, one is getting back to sort of that big picture, you know, that we discussed earlier as it relates to just this low-growth, low-rate environment continuing and the premium that investors will pay, the multiple-- the premium multiple that investors will pay for a lot of the software as a service businesses is going to be higher in that environment.

And so I think as long as we have sort of this backdrop with negative real interest rates and inflation doesn't, you know, necessarily, you know, pick up and we don't see this reflationary environment, I think growth will ultimately remain in favor. And I think when you look at some of the cyclical stocks that are laggards today and seeing this rotation take place where it's a little bit of a risk-off sentiment, those companies priced in so much good news for 2021 within the last 15 trading days. The XLE energy sector I think is up somewhere around the range of like 30% in the last 15 trading days even despite the move today but still down 40%, and I still think that's necessary. It probably reasonably reflects the outlook for 2021 and just how, you know, companies will, I guess, allow employees to get back in the air and what air travel will look like.

And so I think when you look ahead at 2021 and 2022, I think investors, as we maybe see some of these dark days, will ultimately find safety and certainty in some of these software as a service names. It's unusual to say when you're looking at these companies growing so much, but during, you know, downturns, you see investors flock towards these consumer staples and health care and telecom that, you know, are likely to be just, you know, linked to inflation as far as price increases can carry those nice dividend yields. But through the downturn this year, we've seen a lot of investors flock to these business staples.

And so when you look ahead and see the option for virtual desktops and cloud continue to grow, you look at e-commerce sales as a percentage of retail sales-- I think it was yesterday-- report at just 16%. I mean, I don't know about you, but when we spend $100 in our household, a little bit more than $16 is going towards retail-- or excuse me, e-commerce.

And so I guess my point is I think a lot of these names even that carry these premium multiples-- and there's certainly exceptions. But you look at some of the enterprise security companies as well as this sort of new iteration of Customer Relationship Management, where we're calling CRM 2.0, as businesses try to reach digitally to their customers, you know, and make investments in technology to support that venture, ultimately I think, you know, while, again, these are premium-multiple stocks, the [INAUDIBLE] premium multiples, just like as we're seeing, you know with one of the big chip makers today really not sell off after a phenomenal report. It just goes to show the sentiment around those companies and I think overall strong demand for those secular growth names moving forward.

MYLES UDLAND: And I guess, Tim, I would ask though-- and it's not something you flagged in your note to us, but I think about all we seem to hear on this program is people liking value, people preferring, you know, industrials, materials. Obviously homebuilders have already had a great run for a variety of reasons. And it's all premised on this idea that what led the last decade, what led the last market cycle won't lead the next. How do you think about that idea?

And I guess would you consider some of these SaaS plays as not part of the last cycle? Do you think it's a different part of the tech stack that can do well in the 2020s?

TIM CHUBB: Yeah, two great questions. I think we're definitely entering this phase, you know, this sort of sixth iteration of the Industrial Revolution, and a lot of those SaaS plays are going to be, you know, a meaningful contributor to what that looks like.

But, you know, the reason that value didn't perform over the last 10 years was really due to, you know, we didn't have this reflationary environment. And yes, we saw some years where that took place. Namely after the 2016 election and 2017 we saw the market, you know, really favor value with the expectation that we would get an infrastructure bill, all this deregulation, of course tax reform. And after tax reform came out, that next year, GDP only grew at 2.9% when I think the president and others felt like we would accelerate further and get back to that long-term average of 3% to 3 and 1/2%.

And so in order for value to have a sustained period of outperformance, I think you need to have an environment where the yield curve is very steep. You have commodity prices rising. You have inflation that's more than what it is right now. And, you know, that's to say, I guess, present. And so when you don't have that reflationary environment set up, value is not going to have a period of sustained outperformance. And with the Fed keeping rates lower than it probably would have been in previous market cycles with this average inflation targeting, again, you know, we're trying to discount future cash flows. And when rates are very low, those stocks with high valuations or more meaningful valuations than, you know, historically speaking are going to look a little bit more attractive than they normally would.

And so, you know, couple that with the decline in the US dollar. It's down pretty significantly so far this year. We've seen tons of money pile into the US and prop up the dollar for the last 10 years, and these currency things move-- tend to move in four- to five-year cycles. I think this next cycle is dollar weakening. Well, who does that benefit? Technology stocks because of how much exposure they have to revenue outside the US. And so I think the backdrop remains very positive for those companies despite their valuations and ultimately will grow into them.

JULIE HYMAN: Tim, good to see you. Thanks for your time today. Tim Chubb is the CIO at Girard.