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COVID-19 is no longer markets’ greatest risk: strategist

Todd Jablonski, chief investment officer of Principal Global Asset Allocation, joins Yahoo Finance to discuss market outlook, inflation risks, and big cap tech stocks.

Video Transcript

MYLES UDLAND: And Todd, certainly the headline in your note grabs our attention that COVID no longer the market's greatest risk right now. So what are the main risks to the market that you're thinking about and what are some of the implications there?

TODD JABLONSKI: Well, surprisingly to investors who encountered a tremendous fit of volatility last year, you saw the eruption of COVID concerns. As we now sit here in the second quarter 2021, it's economic progress and a potential surge in inflation that's really dominating the conversation I think for investors, as well as a high level of fundamental expectations. I've heard that the markets have, quote unquote, "priced for a perfection" that depends, I think, on how you evaluate the growth prospects. But inflation, earnings, and fundamental improvement have displaced COVID, we think, as the number one concern on investors' minds.

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JULIE HYMAN: And inflation, as you mentioned, is also part of that mix. And I bring it up because we got PPI this morning, which, yes, I know it's not the number that the Fed watches, and it was for March, so before we're going to start to see really big increases. But still, it was double the estimates at 1%. We also at the top of the show talked about the whole semiconductor situation, is that that is going to cause upward price pressure. So, where do you stand on the whole inflation debate? Is it something that investors should be concerned about?

TODD JABLONSKI: I think inflation is a force that investors should be concerned about. And it should be a force that they prepare for. Interestingly, the types of inflation sensitive exposures that many investors seek, they respond to inflation immediately, which means you have to, essentially, as an investor, look to gain those exposures before the inflation happens. We think that there's a temporary surge in inflation that could push CPI up to as high as 3% in the short term.

But when that fades, I think investors are really focused on, at what level do we settle on inflation? And we think it's quite possible that settling in happens at a higher level we've seen over the past decade, which gives a boost towards equities, some segments of credit, and really, real assets to gain in relative attractiveness.

JULIE HYMAN: And so in that case, do you just buy stocks broadly if the view is that you get not just that temporary bump, but a longer sustained higher level of inflation than some people are anticipating? Or are there more specific pockets where people, as you say, people should be positioning perhaps now?

TODD JABLONSKI: I would agree that moving quickly to gain exposure towards inflation sensitive areas within equities makes sense. But interestingly, I think there's two ways to do this. One, you can gain cyclicality through exposures towards equities, particularly small caps and value. An investor can also add cyclicality by looking at fixed income asset classes, things like emerging market debt, high yield, preferreds. Those are areas that we can go to gain cyclicality.

But interestingly, I think it's the big cap tech that's really a very strong hedge against that. And as we look at sort of 1Q earnings season, what we see to be announced, I think what we see from big tech is going to be a very interesting bellwether. And I think it's possible to see the secular strength and the remarkable cash flow generation that comes from big tech continue into the 2021, as we also see cyclical exposures gain in relative attractiveness at the same time.

BRIAN SOZZI: So, Todd, do you buy big cap tech stocks into earnings?

TODD JABLONSKI: I think you look at each one. I think you take a look at each earnings announcement, say, is this a buying opportunity? I would highlight that on a cash flow basis, when you look at where that group has set over the last six months, it's interesting to see some of the consolidation in the multiples there. It's possible to look at big cap tech on a cash flow multiple basis and say, I see relative value there, relative to what the premium might be expanding in financials and some of the other more cyclical sectors.