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Top investment themes for 2021

Kevin Mahn — president and chief investment officer of Hennion & Walsh Asset Management — joins Yahoo Finance Live to discuss the stock market’s recent price action, volatility, as well as his top investment themes for 2021.

Video Transcript

- Let's stay on this topic and talk a bit more about what to expect on the markets in the weeks ahead. Kevin Mahn is the CEO over at Hennion and Walsh. And he joins us now to discuss. So Kevin, let's start with earnings season. Banks get it underway on Friday. Next three weeks will be quite busy, although, as you know, fourth quarter earnings tends to drag out for like two months, it feels like. What are your expectations as we head into this period? And what are some potential maybe slip ups for the market? What are some places that maybe we could get some bad, unexpected news as we get into this reporting period?

KEVIN MAHN: Sure, great question, and happy new year to each one of you. I think obviously it's all relative, Myles. And if you look at the first quarter of 2020, that was essentially the onset of the COVID 19 pandemic and the shutdown orders that were put in place at that time to limit the spread of the coronavirus. That took a big hit on earnings in the month of March and it trickled into April as well. So first quarter 2021, end of fourth quarter of 2020 are going to look very positive relative to the end of the first quarter of 2020 and the second quarter of 2020.

But what I'm going to really be looking at is forward looking guidance. And I think what we've seen in the markets thus far is some of those rotational traits that everybody is talking about starting to take form, those being that international equities will start to return to prominence and also the smaller cap stocks will start to outperform US large cap stocks given the high valuations of a lot of large cap stocks right now.

- One of the other things I know you're looking at, Kevin, is biotechs, which there's been a lot of attention obviously on health care this year with vaccine development and treatment development for coronavirus. And I know you expect some more M&A to go on because, if small companies discover something, the large company tends to snap them up. What do you think is the best approach? Do you think it's trying to find those targets? Or is it just buying a big basket of them?

KEVIN MAHN: Absolutely, I think you need to identify those biotech companies that have innovative health care solutions that are either in stage two or stage three of the FDA approval process, generally where large cap pharmaceutical companies consider making acquisitions. And we saw the pace of those acquisitions start to pick up again towards the second half of 2020 remembering that 2019 set a record for M&A for biotech. We think that's going to continue into 2021 because, unfortunately, the need for innovative health care solutions across society isn't going away. And there's more rare and chronic diseases that we still need cures and therapeutics for. And that's where smaller cap biotech companies come into play.

- Kevin, switching gears a little bit on to big cap tech, at what point does the rise in 10 year yields, at what point does that lead to a sell off in big cap tech names?

KEVIN MAHN: I don't know so much as big cap tech names, Brian. I think it starts to take away a little bit of the luster from those high-dividend paying stock and the value trade. That's one area the markets right now, those three potential rotations that we think we may see in 2021-- the growth-to-value rotation really hasn't picked up these just yet. So dividend paying stocks are an area right now where investors are looking to, absent of finding yield in traditional fixed income oriented asset classes, as the yield for 10 years-- it's risen 22 basis points already since the close of 2020. We are seeing that long end of the curve get higher as well.

Now maybe investors start to shift back into traditional fixed income classes for yield. But if the Fed's going to keep rates lower for longer and if there's more stimulus on the way, we think that helps stocks and it helps technology both large cap and small cap.

- Kevin, that rotation trade certainly a buzzy phrase last year, also buzzy was ESG. How real is that in your view and how meaningful a driver of flows do you expect that to be, not just this year, but really over the next decade? I mean, it is kind of being billed as the next big thing in investing.

KEVIN MAHN: Yes, and thank you for asking that question, Myles. It's one of my top 10 investment themes for 2021, in fact. And that's that sustainable impact investing will go mainstream in 2021 and be part of the selection criteria for all portfolio managers for years to come, regardless of their investment style. And I know that's a large statement.

But what we've seen through the pandemic is that Americans value how companies treat their employees through thick and thin times. They value how they give money back and support their communities in times of need. Of course they value if they're good stewards of the environment and do they return positive attributes to their shareholders, stakeholder capitalism, if you will. And we're fortunate here at SmartTrust to partner with JUST Capital to provide those types of ratings for the outstanding companies that are in America to help provide better investment opportunities. We think that becomes more and more a part of mainstream investing, not just this year, but for the years to come.

- Should we be adding a P for politics to that ESG, Kevin? Because all of these companies that are coming out and saying they are either going to suspend all political giving or suspend it to members of Congress who pushed back against the legitimate results of the election. Do you have clients coming to you and saying, if companies are not making statements like this, I don't want to invest in them?

KEVIN MAHN: Not at this time. They're really looking at those five different stakeholder categories being their most important resource that they have, their employees, the clients that they work with, the customers, the environment, and of course shareholders. But all of that, Julie, becomes part of the impact that they make on society. So they can't be disconnected, if you will. But it's really just those five different stakeholder categories that we're rating right now based upon JUST Capital's research and polling that they do of Americans right now.

And what you may find interesting, based upon their most recent polling, was that Americans valued the way that they treat their customers first and foremost amongst those five different categories. Yes, the environment was important. Yes, the community they the operate was important. Yes, the returns that they delivered to shareholders was important. But number one was how they treat their employees.

- All right, Kevin Mahn CIO at Hennion and Walsh. Kevin, always great to get your thoughts. Thanks so much for joining the show this morning.

KEVIN MAHN: My pleasure. Take care, guys.