'I see most opportunity outside of the U.S.': Strategist

Charles Schwab Chief Global Investment Strategist Jeffrey Kleintop joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ADAM SHAPIRO: But right now, let's bring into the stream Jeffrey Kleintop. He is Charles Schwab Chief Global Investment Strategist. Thank you for joining us. It's good to see you again. I want to ask you something because we can look at commodities as a whole or we can look at just Dr. Copper.

And the reason I wanted to start with Dr. Copper and what it might be telling us is, you pointed out in a recent note to your clients that some of the sell-off we witnessed recently in the S&P 500 had been churning, that 80% of S&P 500 stocks were off by 10% their peak. So given that before the recent experience today in the market, what are commodity prices, specifically copper, telling us about where we're going and the fact that the S&P was actually falling a bit?

JEFFREY KLEINTOP: Yeah, we've definitely seen a rotation. So while you're looking-- if you're looking at the overall index, you're not seeing these pullbacks. But boy, we've really seen a shift towards value oriented parts of the market, including energy, materials. Financials are leading today. And those areas are showing some strength. Many of those have been left for dead for a decade.

So I know a lot of investors are concerned about paying high valuations in an economy that might be slowing. Yet there are lots of areas of the market that we are not paying high valuations. You're actually able to get some good values. And they're the ones that are accelerating here because while economic growth is slowing, it's still strong. And actually, demand is still outstripping supply, as evidenced by some of these commodity markets.

SEANA SMITH: So Jeffrey, then, given this current environment, we have the inflation concerns. We had the Fed's taper timeline. Of course, there's lots of uncertainty when it comes to China. Also, what's going on down in DC. How would you play, or where are you seeing the most opportunity right now?

JEFFREY KLEINTOP: I actually see most of the opportunity outside the US, believe it or not. In Europe right now, you've got a lot more exposure to even the energy sector than you have inside the US. And that's a beneficiary likely to last through the fourth quarter. You've also got more financials exposure. And as yields begin to rise, longer term yields begin to rise, that could be a real plus there, along with the return of dividends next year.

And whenever global economic growth is above average, as it's anticipated to be again next year, you get better-- you get outperformance by Europe versus the US. So I'd look there. Again, better valuations, more attractive earnings growth and revisions on the back of stronger economic growth.

ADAM SHAPIRO: But, you know, as we look at the totality of all of this, copper prices have actually been falling. And there's a lot of concern when you look outside the United States that China is going to slow down. If China catches cold, doesn't Europe get the flu? And what happens to us?

JEFFREY KLEINTOP: Certainly, if China slows down much more dramatically than it is already, you'll see that across the commodity complex. And absolutely, you'll see that reflected in Europe. But I don't think that's going to be the case. I think what we often find after periods of specific regulatory tightening in China, which almost happens every year-- and that's why 17 of the last 20 years have had a bear market for Chinese stocks-- what often follows that is broad policy easing. And I think we're on the cusp of that.

Now, not only have there been a lot of liquidity injections over the last week or so, but we're likely to see another Reserve rate cut. We're likely to see maybe broad stimulus because the Central Bank in China really hasn't cut rates. It really hasn't engaged in much fiscal policy stimulus either. I think that may be coming here in the fourth quarter, stabilizing and even rebounding Chinese economic growth in Q4, leading to better results for Europe as well.

SEANA SMITH: So Jeffrey, then, that reaction that we saw to a lot of the concerns surrounding Evergrande just a couple of weeks ago and what that means not only for China, but the global contagion possibility there, were a lot of those fears, then, just simply overdone?

JEFFREY KLEINTOP: Well, there are certainly deep problems within property developers in China. But property developers are not banks. This isn't-- it's not-- you know, Evergrande isn't like Lehman or Bear. It's like Pulte or Lennar. It's a homebuilder. And when a homebuilder has some problems, that can certainly cause some problems, but nowhere near the types of things that would cause a financial collapse.

So we were seeing, even when you look at the high yield bond market in China, a lot of issues with property developers, but not among the other issues. The other top five issues in the China High Yield Bond Index are trading at above par. There's no real contagion even in the high yield universe, outside of the property developers.

ADAM SHAPIRO: I want to get to that other commodity that Jared talked about, which was cotton prices hitting a high. And according to the Wall Street Journal, the Chinese are buying up cotton the way they were buying up pork when they were putting a lot into storage. What do, as just average investors in the United States, what do we make of the fact that they might be trying to really take control? I don't know the right terminology here, but that they're buying so much.

JEFFREY KLEINTOP: A strategic cotton reserve? I'm not sure. I know that China doesn't want to see any shortages. They've already seen production pull back a little bit here. And because of the port bottlenecks, there have been slower export shipments, although we did see a record trade deficit reported today in the US. I think the issue is they do not want to see any more slowdown because of supply chain issues.

So they are looking at making sure they have adequate supplies, at least over the next three to six months. We're going to see a lot of this inventory build-up over the coming months in many countries. We know that shortages often lead to glut. And that could be the real story for maybe the middle of 2022. Semiconductor cotton, perhaps oil as well, moving into a glut. We'll have to keep an eye out.

ADAM SHAPIRO: Jeffrey Kleintop, Charles Schwab Chief Global Investment Strategist, thank you very much for joining us.