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Why there will be ‘more of a transition’ to services consumption as economy normalizes: Strategist

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BlackRock Global Allocation Head of Thematic Strategy Kate Moore joins Yahoo Finance Live to discuss market swings, inflation, retail stocks, consumer spending, and the outlook for commodities.

Video Transcript

JULIE HYMAN: Let's talk more about everything that folks are weighing in the markets right now ahead of the release of the Fed minutes this afternoon. Let's bring in Kate Moore, BlackRock Global Allocation Head of Thematic Strategy. Kate, it's great to see you. You know, something that we have been weighing here is, we've been watching all of these retail reports, is what the implications are for inflation. As we see inventories building and building at these retailers, there are a lot of questions being asked about what that's going to mean for prices and then inflation by extension.

Is there a risk here? Could we actually see inflation come down more quickly than the market and the Fed are expecting?

KATE MOORE: Yeah, it's a great question, Julie. And let me just say, I mean, I think there's been a tendency throughout all of retail earnings, some of the early reporters and some of the companies that have reported this week, to take one specific example of these consumer companies and extrapolate it out to all of the competitors and maybe make a conclusion around, like, all consumer sectors. I just think we need to be a little bit cautious, because each company has a different inventory management. Each company is working with different consumers, and it's pretty hard to discern a very strong trend across the whole consumer sector.

What we do know, however-- and this is one of the big themes that we have been discussing throughout the course of the last few months-- is that, as the economy returns to something more like normal activity-- and I mean that from a pandemic sense, not necessarily just from a growth perspective-- we're going to see more of a transition from goods purchases to services consumption. And we think this is going to be a more durable trend. People are going to spend more on experiences. More of their wallet share will go to either travel or entertainment and other types of services.

So maybe we see some higher inventories in some of the consumer names. I don't know that tells us too much about overall activity. It could be that inventory management, or it could be just a shift in the spend.

JARED BLIKRE: Thank you for joining us here today. One of the other themes I know you're tracking from your notes here besides the rotation of consumer spending is also favorable supply demand backdrop. And you're looking into natural resources. We've seen commodities surge and taking a little bit of a step back here in some cases. But I'm wondering where you see commodities trending and these materials and natural resource stocks that you might be interested in.

KATE MOORE: Yeah, we started building some of our positions in energy and natural resources in the second half of 2021. And that was pretty much just about supply-demand imbalance. We've seen a lot of global mining companies, and certainly a lot of global energy companies, have strong capital discipline over the last five or six years. And what that basically means is they have not been spending aggressively when prices were buoyant. They were really focusing on cost control and, frankly, streamlined their businesses.

That was a good story. So as prices have rised, we've seen more earnings and more profits accrue to these resource companies. And of course, Russia's invasion of the Ukraine and some supply disruptions have exacerbated that supply-demand imbalance. One of the things, Jared, we're looking at very closely right now is whether or not the slowdown in Chinese economic activity leads to some softness in commodity prices in this quarter and whether or not that leads to a better entry point for some of these resource companies. It may. But medium-term, we expect this to be very durable.

We don't think companies are going to spend on expanding production aggressively in the near term. And even if they did, many of these projects take several years to come online.

JULIE HYMAN: You know, Kate, when we talk about natural resources, frequently we're talking about energy, which has been the big outperformer. But of course, there's a lot more to natural resources, right, and raw materials than just energy. We've got food. We've got metals. Et cetera. So I wonder if you are broadening the lens, or if you're really focused on energy here.

KATE MOORE: Yeah, we've broadened the lens. Let me say that one of the areas that gained a lot of attention for us in 2021 were some of the base metals, the industrial metals that were being used during the energy transition, things that were essential, say, to battery production, like lithium, copper, that were supportive of both economic demand as well as to energy transition. And so there's strong underlying support for some of these resources. We have been more aggressive in our agricultural expression as of late.

Some of that has to do with poor harvests and lower inventories, and of course, once again exacerbated by Russia's invasion of Ukraine and the fact that we're not getting grain out of that region. One way we like to invest around here is not just, say, on a specific company, but thematically, I like investing in seed companies, fertilizer companies, crop protection, and then agricultural technology, and really taking a more holistic approach to what we think is going to be a more medium-term agricultural cycle.

JARED BLIKRE: And Kate, we've got time for one more here. So I want to hit on your third trend that you're looking at this year, and that has to do with digital spending, the digital transformation. Some companies had fallen behind. Some caught up. And some are still being left in the dust. What are you seeing there?

KATE MOORE: Yeah, Jared, there's been a massive repricing of this entire sector, mostly because valuations for digital infrastructure had gotten quite lofty over the course of the pandemic. Just because valuations have come down doesn't mean these are not essential businesses. In fact, when we talk to chief technology officers and chief financial officers and chief information officers, we get the same message consistently, which is spend in this area, is Teflon, in the sense that it is an operational risk for a lot of businesses to not spend on security software, to not move to the cloud, to not make software and systems improvements, even if the economy is not running at the same rate as it was in 2021.

So while there has been significant price pressure in some of these areas, I would suggest that the actual fundamental prospects for digital infrastructure-- cloud, security, software, and systems-- is actually very strong.

JARED BLIKRE: I would have to agree with you. And we're going to leave it there. Kate Moore, BlackRock Global Allocation Head of Thematic Strategy. Thank you.