Inflation is something we're watching for: Strategist

Gaurav Mallik, State Street Global Advisors Chief Portfolio Strategist joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

AKIKO FUJITA: We got fresh inflation data today showing easing, at least easing some fears, of inflation spiking in a significant way. Consumer price index gained about 1.7% year on year consumer prices, up 0.4%, which was pretty much in line with expectations. And we've seen the 10 year pull back just slightly from those highs we saw earlier in the week. It is at 155 there.

Let's bring in our next guest. We've got Gaurav Mallik, who is State Street Global Advisors' chief portfolio strategist. It's good to have you on today. I want to just get your response or reaction to that data that we got this morning, because there seems to be two sides, two ways of looking at this, really. You know, some would say it was pretty much in line. It shows that things are not on this runaway path that people have warned about, but others say we have to look at this in the context of the way it's calculated.

GAURAV MALLIK: Yeah, I think that we share the view that absolutely, you need to look at it in the context it's calculated, et cetera. But I think we're in the camp where inflation is something we're looking at, is something we're watching for, but we're not in the camp that we're likely to see any form of sustained, and let me stress that, any form of sustained pick up in inflation.

We do expect with base effects and all the stimulus coming through, there will be some somewhat spike in inflation, especially as we look at Q2 data given the year over year comparison, but we don't see concern, we don't see the need to be concerned about runaway sustained inflation. So we're in that camp right now. So the kind of data kind of validates that view in some ways that there is something of an inflation, but nothing to suggest investors need to be worried too much about an extreme move in rates or an extreme pickup in inflation on a long term basis.

ZACK GUZMAN: Yeah, when you dig into the report, I mean, what stands out to you? Because Morgan Stanley was flagging a couple of things from this report, notably rents, 0.2%, and that was the largest month over month increase that we've seen since May of last year.

When you think about what could lie ahead in the rest of the reopening, you can think about prices in airlines, as well as restaurants, potentially, as people go out, food costs rising. What do you maybe see as those indicators to watch moving forward, if that is your position that it's not going to be sustained in the months ahead, that might jump out to you to signal, all right, maybe that isn't the case as we get further along in the recovery?

GAURAV MALLIK: So I think that for there to be a sustained pick up in inflation, the number one indicator for us is basically what occurs with productivity and what occurs with sustained wage growth. Now, we were earlier talking about the coming stimulus. Clearly, that's something that has, you know, provisions, potentially, for a $15 minimum wage. That already the benefit that most people are getting is about $10, which is higher than the federal minimum wage right now.

So there is going to be some things, restaurants are a good example of that. The service sector, there is going to be pent-up demand. All those we see as temporary spikes. For there to be a sustained level, we need to see wage growth that we have confidence is going to be sustained. We need to see productivity improvements being reflected in GDP and in the economy.

That would give us reason for concern. And I just go back to, sort of, Trump's tax stimulus. That was a point in time when we had full employment. Today, we have 10 million unemployed, and at that point in time, there was concerns that there's going to be runaway inflation. We did not see that play out. I don't want to minimize the risk on inflation, but I don't think it's something that we're worried about as being sustained as I would put it back to you.

AKIKO FUJITA: Gaurav, let's talk about how you're positioning yourself right now in the market, and not just in the US, but obviously, you've got some interest in emerging markets, too. What are the particular sectors that you think could be supportive of this environment, just given all of the variables that create so much uncertainty?

GAURAV MALLIK: So, number one, like, on a global basis, we're definitely long growth assets. We do like equities, to some extent credit. We're underweight bonds, so that kind of reflects the view that bonds are likely just not giving that much into your portfolio besides providing some diversification for any adverse movements and that with the long duration side. So definitely the camp of being in equities for long US equities.

We like emerging market equities. This is about the best environment for emerging market equities we've seen in a long time. US investors are underweight EM. We see tailwind in the shape of sort of a secondary downtrend in the dollar. We see commodities supporting it, so many reason to be excited about that.

I think we are scaling some budget for growth in tech, and the reason we're doing that is because we do believe that there is going to be these waves that are going to occur with COVID, COVID vaccinations. We introduced our market outlook in November of last year, and we pointed to the notion that it's a year in which resilience is likely to be retested, so with that in mind, we do want to reserve some things for areas like tech where we do see a bit better resilience in case there's any adverse scenarios with COVID.

AKIKO FUJITA: Gaurav Mallik, State Street Global Advisors' chief portfolio strategist. Good to talk to you.