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We shouldn't see immediate tax hikes until economy is stronger: Strategist

Willem Sels, HSBC Private Banking Global Chief Market Strategist joins Yahoo Finance Live to break down how markets are faring after Wednesday’s turmoil at the U.S. Capitol.

Video Transcript

[MUSIC PLAYING]

AKIKO FUJITA: Welcome back to Yahoo Finance Live. We are seeing a record across all three major indices right now, the Dow up more than 300 points, the NASDAQ up nearly 300, and the S&P 500 up about 55.

Let's bring in Willem Sels. He is HSBC's private banking global chief market strategist. And Willem, it's good to talk to you. It was an extraordinary split screen, if you will, yesterday playing out as we saw the violence unraveling in DC. And then you saw the market sort of just continuing to push higher. We're talking about new records again today. What do you make of this disconnect?

WILLEM SELS: Yeah. So the market is looking at the outcome of the Georgia Senate elections and basically taking this as an-- reflationary trade-- i.e., hoping that there will be more fiscal spending and not yet immediate tax hikes until the economy is stronger. So what you're seeing, therefore, is an outperformance of the cyclicals, of the domestic stocks, of the small-cap.

And also, obviously, you've had this move in the bond markets where, because of that reflationary trade, the market is pushing US Treasury yields higher. We are somewhat more skeptical about the longevity of that upward move in the Treasury yield because clearly, the Fed will try to make sure that financial conditions don't tighten too early.

- The other idea here, too, is that we are seeing quite the rally to start 2021, already hitting some banks' year-end targets here. So, I mean, talk to you-- talk to me about how stretched we might be already and what you see in terms of risks for pullback from these levels.

WILLEM SELS: Well, obviously, the uncertainty around the-- any forecast, whether that's an economic forecast or an interest rate forecast or even an equity forecast, is very broad. And maybe that's not very helpful in terms of an answer. But it is the reality, I think, if you look at, you know, what is happening to the spread of the virus here in the UK, for example, where I'm sitting. When are we going to reopen? How is then, when we reopen, the consumer going to react, because consumer confidence is extremely hard to model? So let's face it. It's, you know, a difficult call.

That being said, we do think that, although valuations are high, those valuations are warranted by those long yields. And also, we do think that earnings are going to continue to be revised upwards by analysts. So we do think there is still upside to the equity market. We're not yet at our targets. But we would not really go into the cheapest stocks just because they are cheap.

You know, again, coming back to that uncertainty around when, you know, economies are really going to reopen, if you have a company that is going to have a lower than normal cash flow for another six to 12 months because the economy remains shut here in the UK, for example, then you need a strong balance sheet to be able to weather that. So we would caution against buying stuff just because it's cheap and to go into-- and to go too much into value stocks.

AKIKO FUJITA: And Willem, outside of the US, the popular trade seems to be in emerging markets. We've had a number of guests come on talking about how bullish they are on EMs. Where are you finding opportunities outside of US equities right now?

WILLEM SELS: So we are overweight, as well, on China. Clearly, there is-- China is-- has been coming out of the COVID crisis as one of the first countries. There is an 8 and 1/2% GDP growth that we are forecasting there. Its domestic consumption-- it's obviously continued-- stimulus as well from the credit side.

There is also-- China is well integrated in the global manufacturing chain. And global manufacturing is already picking up. There is also, obviously, the five-year plan, which is focusing on that "dual circulation," which is upgrading manufacturing, increasing the technology content of the economy, and also the integration to the rest of Asia. You know, obviously, the RCEP deal is going to help there as well. So it's one of the markets that we like and that we're overweight on.

I mentioned the UK. We've actually gone overweight on the UK in spite of the coronavirus situation here. It's a very cheap market. In part, that was, obviously, because of Brexit uncertainty-- in part also because there is a lot of value stocks, a lot of, you know, energy materials. And for the moment, at least from a tactical perspective, we think some of that premium, some of that valuation differential, will probably narrow vis a vis the US.

- And Willem, too, just back on the side of what kind of mix you see playing out here in 2021, I mean, if you're saying don't buy cheap stocks value-side just because they're cheap, I'd also be curious to get your take on tech stocks and the way that the growth sector has been performing here, too. I mean, how do you see the right balance shaping up this year given kind of that rotation already beginning, considering some of the risks, I think, that exist in terms of anti-trust regulation as well as other things here we're seeing play out on the political side now as Facebook, one of those companies that has long kind of stayed out of that game, now says they're going to be banning President Trump's account indefinitely, at least through the transition here? So talk to me about what you see playing out in that sector.

WILLEM SELS: Yeah. So that was the big story of the end of last year. And it continues currently, which is that question about rotation from growth stocks into value stocks. And, you know, in part, it is, obviously, triggered by the valuations of some of those tech stocks, especially the FANGs, obviously.

So we would first point out that technology is not just the FANGs. There are opportunities in smaller companies that are probably less of a focus of that regulation. There's also technology companies outside of the US. And you can diversify into those.

We also think that technology really is more than just the technology sector. There's basically tech leaders in every single sector. And so you can take advantage of that, you know, digital revolution without being in the tech sector. We're thinking of health tech. We're thinking of automation.

There is a good reason to rotate out of tech to some extent. And that is a broadening of your exposure. So as we are more optimistic about the cycle, we are diversifying out of tech into some of the other cyclicals. That doesn't mean that tech is bad. The bad reason to diversify out of tech would be being scared about interest rates because we don't think they are going to go up.

So, you know, it's a nuanced message. From a longer term perspective, obviously, you know, the prospects of some of those companies really remain quite bright. So you continue to want to have exposure to some of those.

- All right. Willem Sels, HSBC private banking global chief market strategist-- appreciate you joining us here on that. Be well.