China is ‘the big engine’ that will drive markets higher: Strategist

Insigneo CIO Ahmed Riesgo joins Yahoo Finance Live to observe market rallies and inflation coinciding with the Fed's interest rate hikes and recession risks juxtaposed to growth in international markets.

Video Transcript

DAVE BRIGGS: All right, joining us now is Insigneo chief investment officer, Ahmed Riesgo. Good to see you, sir, and happy Friday. So 11 out of 13 weeks, the S&P has finished down. It's a new month. Will it be the same old story?

AHMED RIESGO: Well, look, the first half of the year, obviously, very difficult. There's been a rapid tightening of financial conditions. I don't think investors realize this, but financial conditions, basically liquidity out there, has been tightened as quickly as it was given at the start of the pandemic. So it was an unprecedented start to the year, but it was also an unprecedented rapid rise in financial conditions.

Now, we do think the second half of the year is going to look better overall for investors. I wouldn't get too optimistic here in the third quarter, because the Fed has basically told us that they need to see several prints of inflation come down before they can, let's say, take their foot off the gas. But I do think the index will end the year somewhere higher from here. I'm looking at a range of somewhere between 4,200 to 4,400 on the index for the end of the year as fair value.

RACHELLE AKUFFO: Yeah, speaking of not optimistic, we saw that the Atlanta Fed GDP now data came out. And they're estimating a seasonally adjusted 2.1% contraction for the second quarter. What's your reaction? Because you don't predict a recession in the next six months.

AHMED RIESGO: Right, well, I'm glad that you bring that up. The Atlanta Fed GDP, it's one signal. It's a very noisy signal, by the way. It fluctuates quite a lot. It's highly volatile. So it's hard to just rely on that one signal. We actually have a recessionary indicator that has over 50 different inputs, the Atlanta Fed being one of them. And we still have a very low probability of a recession over the next six months.

Now, our fear-- and I think this is what the markets have been grappling with over the past couple of weeks-- our fear is that the Fed might think that the only way that they can bring down inflation to the levels that it wants to is by purposely causing a recession. We don't think that's going to be the case because we do think inflation is actually going to be falling a lot faster than what the Fed and/or market participants have been saying lately it will.

SEANA SMITH: Ahmed, you mentioned your year end target, 4,200, 4,400 on the S&P. What's going to get us there?

AHMED RIESGO: Well, I think one thing that's sort of not being talked about so much here in the US, but I think is very important, is China. We've seen a sort of a turn and inflection point in the Chinese economic numbers. And that's going to be very important for global growth. China is coming out of lockdown.

And China is really on its own cycle. China-- the economy in China is expanding, is accelerating, rather than decelerating, how it is in the rest of the world. And Chinese fiscal and monetary policy is also turning more accommodative on the margin. Again, the opposite of what's happening in the United States, in Europe, and elsewhere. So I really think China is going to be the big engine that's going to help global growth stay afloat in the second half of the year.

DAVE BRIGGS: Yeah, Jerome Powell always talked about we need help from one of those external elements, as he called it. And that certainly would be one of those that would help turn things around. You talked about how the Atlanta Fed is volatile. Well, Jared Blikre just showed us how volatile the bond market has been. What is it signaling to you?

AHMED RIESGO: Well, I think what the bond market is telling you is that, really, the market is no longer so much worried about inflation. You've seen it basically collapse in market-based long-term inflation expectations. They're down-- they're hovering now around 2. They were around 2.3, 2.5, if you looked at five-year, five-year forward breakeven rates. I think the market has gone from worrying about inflation to worrying about recession and sort of the-- especially the price action in the bond market, in the yields, are reflecting those growth fears.

RACHELLE AKUFFO: And I want to ask you about the consumer. Obviously, consumer sentiment really was that final push that got us that 75 basis point hike from the Fed. What are your expectations there? How much more do you think this is going to keep weighing on the consumer, and then eventually, trickle into things like earnings?

AHMED RIESGO: Yeah, I think that's a great question because one of the most interesting things we've been seeing in the economic data is that there's this huge-- this massive gulf opening up between consumer sentiment and actually real-time activity data. So people are feeling a lot different than how they're acting.

I think part of the Fed's, let's say, rationale in increasing by 75 basis points at the last meeting was that they saw those consumer-based long-term inflation expectations go up. But again, remember, those are also very volatile. And they're highly correlated with gasoline prices. So I think the Fed's fear was that this would be sort of a self-reinforcing, self-perpetuating cycle that people expecting ever higher and higher prices, they were going to be demanding higher and higher wages. And that was going to turn into an inflationary spiral.

But like I mentioned, growth is slowing. It's slowing quite sharply. We're seeing a lot of weakness in the housing sector. We think that's going to be, at best, a flat year for house prices in the United States. And we're even projecting outright price contractions in some of the more vulnerable markets like Canada, Australia, Japan, and New Zealand.

So that's one area. We're going to see a pretty sharp drop in housing data. That has not been factored in either by the federal markets, which is why I think, ultimately, where Fed funds rate were a few weeks ago or a few days ago, even, really, at 3 and 1/2, I don't think we're going to get anywhere near there by the end of the year.

SEANA SMITH: Interesting stuff there. Ahmed, the defensive setup that we're seeing today, utilities, real estate among the leaders there, when we talk about getting to that 4,200, 4,400 by the end of the year, what's going to lead us there? Do you think these defensive plays are going to remain in favor? Could we see a return of some of those growth sectors leading the way?

AHMED RIESGO: Yeah, that's exactly right. And I think a lot of people have been saying, well, look, growth has, obviously, massively underperformed. The S&P is down, let's say, 20% for the year, whereas the NASDAQ is around 30. So there's been a massive underperformance. But the outperformance over the last 10 years for growth has really been something to behold. And I think that's going to reverse.

Like, traditionally, growth tends to trade at about, let's say, a 50% premium when you look at forward PE ratios for stocks. That got to 130%. Even with the sell-off that we've had in growth and tech, that number has only come down to around 90%. So it's still trading quite above historic averages in terms of premiums versus value. So I still think the value sector, the more defensive sectors like you mentioned, high dividend paying stocks, utilities, banks, I think that's the place that you want to be going forward.

SEANA SMITH: Ahmed Riesgo, always great to get your perspective. Thanks so much for joining us. Have a great weekend.