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Investors should wait for 'a bit more detail' regarding new COVID variant, BlackRock strategist says

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Vivek Paul, BlackRock Investment Institute UK chief investment strategist, joins Yahoo Finance Live to advise investors how to react to the COVID Omicron variant as more information comes out, and how the Fed is considering the variant in terms of the economy.

Video Transcript

[MUSIC PLAYING]

JARED BLIKRE: Welcome back. Markets still bouncing back off their highs. But that's after the worst Thanksgiving Day performance since 1931. And we want to continue that discussion with Vivek Paul. He's a BlackRock Investment Institute UK chief investment strategist. And thanks for joining us here today.

I'm just wondering, big picture here. What do you make of this market action? Is it something of a one-off? Should investors be a little bit more concerned here than maybe last Wednesday?

VIVEK PAUL: Well, thanks for having me on, firstly. It was understandable, I think, the reaction that we saw on Friday. There was some big news about the new variant. We've heard more from the president just now. And as with always with these sorts of things, information is coming rapidly. It's evolving in real time. You can understand why investors at the time were kind of taking a little bit of a pause and also particularly given the liquidity situation we had going into the US holiday season.

I think the reaction you've see today, I think, kind of puts it in a little bit of context. We've seen more information kind of come out. And clearly, we have to await the science in a bit more detail with regards to the longevity, I guess, of how Omicron plays out. But we would kind of be in line with kind of the market reaction today.

We think on balance, it would make sense to be invested in the market at this moment in time, because it's all about understanding whether or not this is, if you like, a delay or a derailment of the restart that we've seen. And it seems most likely at this moment, notwithstanding more information to come, that it looks like a delay.

AKIKO FUJITA: And Vivek, we heard from President Biden a short time ago. He was asked whether, in fact, this now becomes a new normal for a lot of Americans and those around the world, quite frankly, these new variants popping up, potential discussion about updating the vaccine. And I wonder how we should look at this in the market context.

It feels like we're still getting some big swings on any COVID headline. At what point does this kind of become a normal for investors?

VIVEK PAUL: Well, it's a great question. But I think the thing I would say here is that each of these sort of successive variants, or going back to the onset of the crisis in the first place, the reaction has been different, right, in the sense that the hit to GDP from the first variant, first main variant was obviously much materially less than on the outset of the original discovery of COVID-19 in the first place.

And I anticipate that as time goes on, each successive variant will be viewed in that light, that we are more accustomed to dealing with this. We are able to produce new vaccines that are targeted in a very short space of time.

It is a very different environment to where we were 18 months ago when we didn't even know if vaccines would work. That is not the situation we are in now. So while it's likely, clearly just from a genetics point of view, that we're going to have mutations, what we're seeing is a trend in our ability to cope with those mutations. And I'd expect that to continue.

JARED BLIKRE: Well then, I want to get your take on inflation here because that has been heated, which is to say the least. And we know that Powell and the group at the Fed are taking into consideration everything that's going on. So on the one hand, you have this economy that could be on the verge of overheating. And then on the other hand, you have this new variant, lots of unknowns. Kind of walk that tightrope, if you could, with Chairman Powell here.

VIVEK PAUL: Absolutely. And I think it all kind of comes from the same place, in the sense that I mentioned earlier this idea that this is a restart and not a recovery. And I think that is crucial for understanding the entire picture to some degree because if it's a restart, as we believe it has been, then what you're going to see is a period of time where supply and demand dynamics are going to crash against one another. And that's what we've seen.

That's why we've seen those inflation numbers be so elevated. We're going to see that for a period of time yet. This is still going to be very much a 2022 story. What the Federal Reserve has already shown is an ability to kind of look through that to some degree, to be able to focus on the other aspects of their mandate, in particular to do with the labor market numbers.

So for us, this continues to be a situation where you compare the reaction of the Federal Reserve now to previous hiking cycles, they would likely have already gone. The fact that they've changed their mandate explicitly means that they're buying into this notion of a shallower path of liftoff. Liftoff is going to happen in the course of 2022, we believe. But the path from there, we think, is likely looking a little bit different to where we've seen it in the past.

AKIKO FUJITA: And Vivek, you've got an interesting report out here, talking about climate repricing that's happening. We have seen so many of these stocks, these ESG funds that have seen big upside. And yet, coming out of COP26, there seems to be more calls for additional standards of the steps these companies are taking. Investors trying to separate who's actually taking these steps versus those who have not necessarily calculated their risk. What kind of pullback are we talking about or downside are we talking about if you're saying repricing? And what are particular sectors you're watching?

VIVEK PAUL: Well, firstly, let me just be clear about what we're meaning by the repricing. Our view is that the markets, even to this day, have not fully kind of anticipated the amount of the repricing that's going to occur. And to be clear on the directionality, what that means is we think that, all else equal, leaning into those securities at a better place for the transition, will be a return enhancer through that transition.

And so what we've done and what we've seen in the research that we've kind of put out there, that the repricing that we've seen to date we think is a real thing, is statistically significant now. It wasn't necessarily the case in the past because clearly, this is a phenomenon that markets have woken up to in the last couple of years.

We believe though, crucially, that the majority of that repricing is yet to occur. So that means, while there will always be the odd company that might be overvalued, systematically, we believe we're far from any sort of notion of bubble territory. We believe leaning into greener assets, all else equal, is likely to be an enhancer over the period of the transition that we're going to see.

JARED BLIKRE: And we got to leave it there. But we really appreciate your insights and your time. Vivek Paul, BlackRock Investment Institute UK chief investment strategist.

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