Investors have to 'pick and choose the areas benefitting from the recovery': Expert

Solita Marcelli, UBS Global Wealth Management Deputy CIO Americas, joins Yahoo Finance's The First Trade to discuss overall markets, jobless claims and what to keep an eye on as economies begin to reopen.

Video Transcript

BRIAN SOZZI: Let's stay on the markets here with Solita Marcelli. She is the Deputy CIO for the Americas at UBS Global Wealth Management. She joins us on the phone. Solita, good to speak with you this morning.

I look across a lot of sectors of the market, more specifically the NASDAQ, and to me, they're starting to look a little toppy. In your view, what's the next upside catalyst for the markets?

SOLITA MARCELLI: Good morning, Brian and Alexis. Great to be here with you. So yes, and actually this is one of the topics that is most hotly debated with our clients as well. It's the valuations. Investors are pretty much weighing whether the valuations are out of whack with the economic reality.

And let me put it this way. Like, I believe in the recovery process, as far as the markets are concerned, we're going into the next phase, right? The first phase was driven by liquidity injections, stimulus package, but also, as you mentioned, significant outperformance of large caps driven by megacap tech firms who are the beneficiaries of the stay-at-home economies.

As I think that economies open up-- which is what everybody is watching very closely-- and people get back to their more-or-less normal life, those sectors which represent physical economies should lead, right? There's no doubt that liquidity injections have not been as powerful for small caps or mid caps as they did for large caps, which have done pretty well given, you know, the nature of the quantitative easing, corporate buying.

But we think, you know, parts of the market that have lagged, like mid caps, are going to be at the sweet spot of both benefiting from central-bank actions and take the lead in the opening-back economy.

ALEXIS CHRISTOFOROUS: Solita, is that where you see valuations looking attractive right now, in those underperforming mid-cap and even small-cap stocks at the moment?

SOLITA MARCELLI: Yes. I mean, small-cap stocks are a much more levered play. And, you know, let's be frank. We're not completely out of the woods. There is still the risk of a second wave, right, and also more probably volatility that's going to come to the markets from the US-China tensions.

But mid cap, that's why I said are either beneficiaries of the opening of the economy and probably a less levered play. When you look at the overall markets, right, the valuations, like you said, it's toppy. So rather than adding overall to equities, it's these intraequity rotations where you can find opportunities in lagged segments. I think that's going to help drive nice returns.

BRIAN SOZZI: Solita, I was on a call this morning. Macy's CEO was holding an update on the state of their business. And I'm on this call, and I'm just listening to them talk about staggered store openings. The stores they have opened already, not a lot of people showing up. What they're doing is curbside delivery. And my main takeaway was, wow, earnings estimates for the S&P 500 are just too darn high. Do you share that sentiment?

SOLITA MARCELLI: So it certainly looks fairly valued, overall market valuations, and it's going to be key to see how corporations and individuals are going to be reacting to the easing of the lockdown, right?

I think there's going to be winners and losers. Yes, the restaurants are not going to get filled up very quickly, but I think, for example, quick-service restaurants are going to be beneficiaries. So you have to pick and choose the areas that are going to be benefiting from the recovery.

What we have done, for example, is look at areas that might be the earlier beneficiaries-- like, for example, from back to work or back to play. Maybe it's not going to be, like you said, the stores that's going to benefit from it, but there are segments within the industrials and materials that might be key beneficiaries of a rebound in manufacturing because as the economy begins to reopen and hopefully unemployment rates start to fall, you know, people are going to start to come back to business, and manufacturing is probably [? going to ?] be the earlier beneficiaries of this.

Also, you have, like, gasoline refiners, auto-parts retailers that might be the earlier areas where we see improvement, especially when people start, you know, driving in summer months.

BRIAN SOZZI: You know, in that regard, do you think we are getting ready to see a rotation from some of these big-cap tech stocks like FAANG into some of the industrial stocks that I think still haven't really caught a bit?

SOLITA MARCELLI: Yeah, I think-- I think it's too early to call the rotation right now, but within the next, you know, month or two I think there is a likely-- the case for that is improving for sure. It's all going to depend on how investors-- what a person's-- investors' perception will be about how the second wave is going to play out.

If, as we open up-- you know, as we watch the impact of easing of the lockdowns on hospitalization rates and we realize that maybe there's going to be a second wave, and it's going to be not more manageable or maybe it won't be as big of a second wave at all, then I think you would start seeing that rotation.

ALEXIS CHRISTOFOROUS: I'm curious your take on energy right now. We're seeing oil prices well off their lows. Crude oil is actually above $34 a barrel right now. And energy has really been sucking wind out of this market. Do you see some pockets of opportunity there?

SOLITA MARCELLI: Well, yes, but it's a difficult one because in terms-- oil-- energy-- oil has suffered from the double shock, right, both on the supply side and on the demand side. We have some supply costs, and actually we're seeing some of the US producers cutting their production faster than we originally anticipated, so that's helpful. The OPEC cuts are encouraging but probably not enough.

But more importantly, now we're seeing with China coming back online, the demand is picking up, and the hope for the reopening of economies in the US and Europe is certainly supporting the increase that we have seen energy prices over the last few weeks.

The issue there with oil is that even though we see the, you know, spot prices moving, if you want to invest in oil, you are also subject to raw yields. And when you look at the curve, it's pretty steep. So it's too early to say this is the right time to get in because your total returns are going to be less than the stock prices that you're seeing.

So we are hopeful. Our view in the second half for energy prices is much more positive. I think we would be around, by the end of this year, with a four handle. But that said, it's too early to make a big call to jump in right now.

BRIAN SOZZI: All right, let's leave it there. Solita Marcelli, deputy CIO for the Americas at UBS Global Wealth Management, thanks for taking some time this morning.

SOLITA MARCELLI: Thank you. Pleasure to speak with you.