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Equity risk premium 'is where you want to be' amid inflation: Strategist

Johan Grahn, Allianz Investment Management Head of ETF Strategy, and Paul Hsiao, Canvas Ventures co-Founder & General Partner, sit down with Yahoo Finance Live to talk about inflation amid Fed rate hikes, gas prices, and the equity market.

Video transcript

SEANA SMITH: Here's today's closing bell.




DAVE BRIGGS: All right, there is your closing bell on this Tuesday, August 9. Let's check out the final numbers from the markets as they kind of hold their breath for that inflation print tomorrow. And there's a lot of red on the board, as you can see, as the Dow drops 56 points. The big loser on the day, the NASDAQ dropping 156 points largely on the back of those semiconductors on the day the CHIPS Act is signed into law by President Biden.

For more on the markets, let's bring in our panel, Johan Grahn, VP and head of ETFs at Allianz Investment Management. And with us here in studio, co-founder and general partner of Canvas Ventures, Paul Hsiao. Paul, good to see you. Thanks for being here in studio.

PAUL HSIAO: Thanks for having me.

DAVE BRIGGS: What do you make of the markets in this moment? Are they holding their breath for that inflation print tomorrow? What do you expect from it?

PAUL HSIAO: You know, I think about inflation, you will see the shelter inflation continues to be at an elevated level. You probably see an increase about another 70 bips. We've seen that in our own portfolio company Roofstock, where the single family rental home brand continues to be elevated.

RACHELLE AKUFFO: --seeing with this latest data from employment and then expecting ahead for CPI, how much narrower does this make the Fed's path forward?

DAVE BRIGGS: Johan, go ahead.

JOHAN GRAHN: Oh, sorry. Yeah, you cut out for a second. Yeah, I'm here. So I think I caught the question. In terms of where the Fed might be taking things and based on the print tomorrow, I think the print will have less relevance in terms of the Fed's direction. They've kind of locked themselves in. They're locked and loaded to go relatively high. Come September, you know, whether it's 75, 50, or maybe even 100, we'll have to wait and see. But nevertheless, that is, indeed, what the markets are expecting right now.

SEANA SMITH: Paul, Wells Fargo was out saying today that inflation dropping to 5% by October because of the drop in gas. Is that a little bit too optimistic, do you think, in your view?

PAUL HSIAO: You know, you're seeing it in the gas stations that you drive through, right? And so that-- they probably have some forward-looking. Certainly, as part of that core component, if that does happen, would really be helpful. I think that is probably a realistic view there.

DAVE BRIGGS: Johan, you say 25% think this is a good time to invest. That is a scary low number. What's your recommendation to the 75? And what's your strategy, given all that we're seeing right now with the Fed likely headed toward another 75 point hike?

JOHAN GRAHN: Well, there's so much uncertainty in terms of where to put money right now. And I had to smile a little bit. I was reading through the "Wall Street Journal" the other day, and they had no less than 20 different ideas for how you can invest. And it ranges anywhere from to buy equities, to sell equities, to buy bonds, to sell bonds, to do nothing. The list goes on and on.

And I guess the short answer is there's no right answer. But in terms of getting participation through the market, there are ways you can do that. And the equity risk premia is typically where you want to be in an inflationary environment. So by placing option strategies in place, you can get access to the S&P 500. And at the same time, you can build in a bit of a risk mitigation strategy on the downside. So you can either do it on your own, or you can buy that in an ETF.

RACHELLE AKUFFO: And Paul, what mindset should people have when they're trying to rebalance their portfolios, like right now?

PAUL HSIAO: You know, I think we're seeing the diversion, right? Those who are beating the quotas, guiding higher. You saw this in Cloudflare. If you sort of get into that mindset, I think that you've seen a very healthy level inflow going into the tech names. And that is-- it feels like a right way to balance.

SEANA SMITH: Johan, we were talking to a guest at the top of the hour last hour. And she was recommending growth over value at this point, seeing a lot of opportunity in some of the names that have been beaten down over the last couple of months. Do you agree with that?

JOHAN GRAHN: It's a really difficult one because I think the most investors will look at this and say, well, rates are coming up. And we have uncertainty and the long duration of tech firms in terms of valuations. That's the theme that's being traded and has been traded. That's why you've seen the bloodbath in tech-- in the tech sector. I think the sector itself is down over 30% year to date. So that's where that's coming from.

Now you can argue whether that is real or not and whether there should be trading purely on rates. It matters less, frankly, because it's what the population is doing that actually matters, and that's the trickiness with the markets, right? So to answer your question, is it time? Maybe. But for-- you've got to remember now, for about 10 years, people argued that it was time to buy value stocks as the tech rally continued. So it's a very, very tricky position to make. And for most investors, it is much better to be in a more broadly diversified investment.

DAVE BRIGGS: Tricky, indeed, but I see you nodding your head over there, Paul. Is that an agreement?

PAUL HSIAO: It is a tricky environment right now. We haven't seen the bottom, right? This could be a quick-- a bounce.

DAVE BRIGGS: But overall, on that strategy, what is your takeaway?

PAUL HSIAO: I think you're looking for that balance, right? I think you're looking for that diversification. We think that a few really select great tech names that are down 60% for the year that have tremendous earnings power in market share gains. And so--


PAUL HSIAO: Cloudflare is a really good example of that, right? You're seeing Snowflake as another one in the big-- sort of in the data space. We think that overall, the data volume continues to go up meaningfully. Healthcare names is a really another. You saw a good bounce with GoodRx yesterday. I think you're going to see more of those names sort of producing pretty great takes.

RACHELLE AKUFFO: And Johan, obviously, a lot of discussion around whether or not we're in a recession based on the strength that we're seeing in the labor market. And also, we're still seeing strength in the consumer, though some paring back there as well. What are some of the signals that you're watching that's really giving you a clearer indication of how you should be investing going forward and approaching the markets right now?

JOHAN GRAHN: Well, we see a huge move in the psychology of people, if you will. And we run some surveys here at Allianz. And some of the indications are pretty stark. And we've seen it now not for just one quarter, but for multiple quarters, is that people are bracing themselves for a recession. And as a matter of fact, two in three are starting to brace themselves for a major recession.

Not just a slight little dip, you know, but something big. You have 8 in 10 people looking at this saying, well, inflation is going to get worse and not better. And you've got to keep in mind that the inflation will hit people differently. It's very different if you're, for example, a healthcare worker or if you're a hedge fund manager. So have a big, big population now seeing this fear coming down the pike, and they will now start to adjust their spending habits. Everything happens at a lag, including whatever impact the Fed's rate hikes will have on the overall economy.

DAVE BRIGGS: OK, got to leave it there. Johan, thank you. Paul, thanks for being here in studio as well. Good to see you both.