Invesco Investment Solutions Senior Portfolio Manager Alessio de Longis joins Yahoo Finance Live to discuss Fed policy, the outlook for equity markets in 2023, and China's economic data.
Video Transcript
DAVE BRIGGS: For more on the markets, we're joined by Invesco Investment Solutions Senior Portfolio Manager Alessio De Longis. Nice to see you, sir. So that setup that we just laid out, combined with that New York manufacturing number, do you share that gloomy outlook that is right around the corner and the r-word continuing to be reiterated by CEOs?
ALESSIO DE LONGIS: Thank you, Dave, Seana. Good afternoon. A pleasure to be here with you. We have been on the contraction camp for the whole second half of last year. But what we're seeing actually now is the data that they are discussing, we believe it's the impact of those long and variable lags with which monetary policy, the tightening of the Federal Reserve, is now showing up in the data.
With that being said, though, an interesting dynamic has emerged in the last couple of months, which makes us a little bit more positive, more optimistic, especially, for the first half of 2023. And the market pulse year-to-date seems to confirm that. We are seeing inflation come down more quickly than the deterioration in growth.
And what that is leading is to renewed market sentiment-- favorable market sentiment where the market is looking at and outlook where the Federal Reserve may actually pause right here, this quarter, or at least signal a pause to its tightening cycle very soon, and allow the economy to breathe a little bit. The unemployment rate remains near all-time lows. That is true here in the US and abroad.
So it's clear that we're not in a recession today. It's clear that we have some data challenges to face. But it's also true that the impulse on inflation is improving and the market is looking at that with a positive tone.
SEANA SMITH: So, Alessio, what does that mean, then, for the markets going forward-- all three of the major averages in the green since the start of the year. How much higher, then, do you think we could potentially be headed?
ALESSIO DE LONGIS: So it's a good question with an interesting spin. We think that the better economic momentum and, therefore, the better-- there are better odds for overall equity markets outside of the US. The China reopening trade-- the speed of the pandemic in China is moving at such a rapid clip that it may be a full endemic phase by the end of February.
So the market is already pricing in today a full reopening around March or April. We're seeing the outperformance of emerging market equities over US equities. We're seeing the outperformance of European equities over US equities, because the conflict, the weather-related fears around energy prices are subsiding. And the dollar is declining. So we expect single-digit positive expected returns for global equity markets, but with potentially a gap widening in favor of international equities over US equities.
DAVE BRIGGS: It's difficult to know how much credence to put into numbers that come out of China, in particular the GDP number of 3% growth-- difficult to believe much of that. But the population pulling back first time in 60 years, how significant is that in terms of their economy and their growth?
ALESSIO DE LONGIS: Well, those demographic concerns are really, really long-term concerns that they are reflected in the potential GDP growth of the economy. To your point, China growing today with the cyclical downturn that we've seen at 3% is disappointing, but it's trend growth rate.
Nobody expected to believe 8% or 10% as it used to be. We're now talking maybe about a 4% or 5% trend growth rate. So the cyclical rebound that we're seeing in the economy due to the reopening has the potential, really, to bring growth above its long-term trend over-- its perspective structural trend over the near-term.
And ultimately, for markets over a one-year time horizon, it's cyclical considerations that matter far more than the structural considerations, such as demographic trends.
SEANA SMITH: So, Alessio, what does that mean, then, for investors today? What should they be favoring when it comes to the value versus growth debate, when it comes to large caps versus small caps, when it comes to some of the cyclical sectors versus defensive? Where is the best place to park your money now?
ALESSIO DE LONGIS: Our picture is one that favors a cyclical rebound-- so tilting equity portfolios towards regions, sectors, and styles that are more exposed to that cyclical rebound, that have more operating leverage.
Emerging markets and European equities are more cyclical, more open to global trade than US equities. Going down the style boxes, as you were mentioning, we favor value over growth or value over quality, depending on how investors prefer looking at it. But that's our recommendation. And we position our portfolios down in caps.
So we favor small and mid caps over large caps. And this translates to sectors that are more value-oriented. We favor financials, industrials, materials, energy at the expense of defensive sectors such as health care, utilities, and even technology. We believe technology has more defensive features with large profit margins and more of a quality bias.
DAVE BRIGGS: We are through-- and our last question here-- we are through big bank earnings. Did you have one big picture takeaway, something you learned when you put them all together in one basket?
ALESSIO DE LONGIS: The earnings season should always be judged with respect to somebody's idiosyncratic factors of the sector, but also knowing and reminding ourselves that earnings tell us something about what has just happened, not what is likely to happen. Earnings guidance continues to come down. I think from an earnings perspective, we expect overall flat earnings growth would be a positive outcome, given how much we've been pricing in for a recession.
And the sector-- the financial sector, if we are right on our cyclical rebound call, should benefit from expectations of lower default rates and lower recession probabilities, at least for the first half of the year.
SEANA SMITH: All right, Alessio De Longis, great to have you. Thanks so much for joining us.
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