Fiscal and monetary policy changes will happen ‘as slowly as possible’: Strategist

Willem Sels, Global Chief Investment Officer of HSBC Global Private Banking & Wealth, speaks on Yahoo Finance Live about the 2022 outlook for the stock market and managing inflation.

Video Transcript

BRIAN SOZZI: Some strategists are saying right now that the economy has entered a midcycle stage, suggesting stock gains will slow over the next 12 months but still remain pretty respectable. Let's see what Willem Sels has to say on this one. He is the global chief investment officer for HSBC Global Private Banking.

Willem, always nice to see you. Really enjoyed your latest-- your outlook piece for next year. You called it the big reset. So within-- what is the big reset? And within that context, where do stocks go?

WILLEM SELS: Yeah, so some elements, you know, remain-- it's an element of continuity next year, and it is indeed as you were saying, that we're in a midcycle stage. Interest rates still remain low, even if they're going up a little bit. They still remain low, so that mixture is positive for markets. That's the continuity, still upward trending.

Then there is the transition, which is the fiscal changes and the monetary-policy changes. Both of those are going to go as slowly as possible. And that is going to create a little bit of volatility, but that is something that we can manage by being diversified and in quality stocks.

And then indeed there is the big reset, and this has to do with the changing business model in Asia focused on stability, continuity of growth. There is the technological change, obviously, and then there is the sustainability side where we will need to take into account sustainability, both in our core portfolios and in our thematic. So a real change, you know, in the way that we invest.

JULIE HYMAN: A lot to consider, Willem, as you look at all of this. Leaving aside for a moment this sort of longer-term structural changes like ESG that you talk about, I want to focus on monetary policy for just a moment. We were just discussing that a few moments ago and, in particular, the Federal Reserve and how it is going to manage the current employment and price situation. What's your level of confidence?

And we talked about whether the equity markets here in the US and elsewhere have priced in what the Fed is going to do. How are you sort of assessing that, pricing in quality right now?

WILLEM SELS: Yeah, so as I said, we're thinking that the Fed is going to go as slowly as possible. They still believe-- they don't call it transitory anymore, you know, the inflation path, but indeed we are with them, you know, when we say that in the second half of next year you will see most likely a slowing of inflation, and that's in part because commodity price inflation probably has already peaked and that, you know, the bottlenecks in the supply chain should start to ease by that time.

The problem is that we don't particularly know what is going to go on in the labor market. That could be the sticky point. You know, so there is more uncertainty around the second half, but still we should, in our core case, get some, you know, downward trend.

That allows central banks to look through, you know, to some extent that inflation spike and start to normalize only slowly. We think the bank-- the Federal Reserve is going to hike twice in '22 and '23. We think this week you're going to get a dovish surprise from the Bank of England and the ECB, who are not going to do anything in terms of monetary policy-- you know, keep a wait-and-see attitude this week.

BRIAN SOZZI: Willem, I'm drilling deeper into the markets. Essentially the rally year to date for the S&P has been driven by about five stocks. The likes of Microsoft remain on-- Apple, $3 trillion market cap watch. Does that bother you?

WILLEM SELS: You know, I think what it illustrates to start with is that growth stocks are still doing well, and that's in part related to the fact that Treasury yields have remained so low. I think we have been out of consensus by saying that growth stocks should continue to be well supported. There have been people who have tried to go into value stocks. I think that's-- you know, that's not really where you want to be. I think you want that balance between growth and value, especially as we think that Treasury yields are going to continue to go sideways, in part because the Fed is slow, in part because of structural reasons that keep those Treasury yields low.

When we invest in technology, though, we try indeed to diversify and not just own those big stocks. We also see opportunities in automation. We see it in cybersecurity. We see it in health technology.

You know, technology is really not just, you know, that one sector as defined by the indices. You should look for technologically advanced companies across different sectors.

JULIE HYMAN: And, Willem, you talked about being diversified, and you're talking about being sort of choosy within technology. Broaden the scope of that a little bit because you talked in your outlook about having to be more choosy going into next year. What are the places that you-- that perhaps worked in 2021 that you might start to avoid or be more cautious about in 2022?

WILLEM SELS: Yeah, so from a sector perspective, we have an underweight currently on the industrials because we do think that, you know, industrials benefit currently from those price increases because of the bottlenecks, the supply-chain bottlenecks, but that doesn't help you very much if you can't shift the goods, if you can't produce the goods because of one of the components that is missing. So, you know, it also helps us to limit the cyclicality of our positioning by being underweight on industrial. So that's one area.

You know, geographically speaking, we've become more choosy as well. We've basically downgraded the UK, you know, a few months ago to a neutral stance, and that is because both the central bank and the government are trying to be less generous to some extent or being forced to be less generous. We are going to see, you know, tax increases here that have already been announced and some rate hikes. That might be just a little bit too much for the UK economy.

And then obviously China did very well in the beginning of the year and then started to, you know, see quite a few headwinds. I think, you know, it's also, you know, cautious, careful, prudent in a certain way to keep a neutral stance there in spite of the value that has been created. So when you invest in China, I think you need to take a longer-term approach, and you need to look at, you know, the priorities of the government and almost invest alongside those priorities. And that's the net-zero transition, and that's the manufacturing upgrade. Those areas should see good support.

BRIAN SOZZI: So you aren't too keen on industrials, but if you're looking for a big reset, Willem, are you overweight commodities?

WILLEM SELS: So commodity prices obviously did very well for a while and for a big part of the year and then has started to run into headwinds, in part because of the Chinese slowdown in terms of construction that I've mentioned, in part because obviously those commodity prices to some extent, you know, when prices go up to match the demand, starts to flag.

Where we see continued demand for commodities is in those areas that are related to the net-zero transition. That investment obviously requires, you know, commodities.

Again, it's a cyclical sector. We have sort of more of a neutral approach because we fail to see the significant upside from here.

BRIAN SOZZI: All right, we'll leave it there. William Sels, Global Chief Investment Officer at HSBC Global Private Banking, always nice to see you. Have a great week.