Portfolio strategist: 'Taking a longer term horizon... is really the right move for investors'

PIMCO Portfolio Manager Erin Browne joins Yahoo Finance Live to discuss the U.S. stock market, volatility, the Fed hiking interest rates, and secular trends.

Video transcript

JULIE HYMAN: It has been a rockier start to 2022, as we have seen. Tech stocks, in particular, software stocks, in particular, as our Jared Blikre was just outlining, on the decline. Oil prices have been on the rise. So what does this tell us, if anything, about how the rest of the year is going to go? Erin Browne is with us now, PIMCO portfolio manager.

And Erin, you wrote in a recent note about this, so-called fat tail risks, that are out there. In other words, that there are some possibilities of pretty divergent outcomes for markets, for the economy, this year. Given that we've already come through a couple of years where there were pretty divergent possible outcomes, how do you game those out, sort of post the lessons of 2020 and 2021?

ERIN BROWNE: First, I think it's important as a starting point, to look at what the growth backdrop is and what your base case is likely to be. And we're still in an environment where growth is still going to be pretty good. And while we're certainly decelerating from a exceptionally strong backdrop that we experienced last year, the rest of 2022, from a growth perspective, is still going to be very supportive for stocks.

That said, as we're entering into an environment with obviously higher inflation, where the Fed is going to start to really raise rates and start to remove a lot of the accommodation that's been in the market, that does pose these left tail risks that we haven't experienced, certainly over the last couple of years. And so I think it's going to be much more of a dynamic trading environment going forward in 2022, than what we've seen, certainly over the last 18 to 24 months.

And so for that, I think it means investors have to be more active, a little bit more disciplined, in terms of taking their profits and also cutting losses in a much more active manner.

BRIAN SOZZI: Erin, when you say dynamic, do you mean we're at the risk of seeing some more corrections in the markets this year as the Fed tries to get out in front of inflation?

ERIN BROWNE: Yes. I definitely think that we're going to experience more volatility in 2022 than what we've seen, certainly over the last year, but even going back over the last decade. We started to see in 2021, volatility creep up. I think we're going to see volatility creep up even further in 2022. And as we reach these sort of transition points in the market, and the biggest transition is going to be the Fed starting to hike rates, that typically means that you're going to have bigger corrections throughout the sort of path of what I think is where we're going to end the year, higher in terms of markets, but we're going to have bigger corrections along the way.

JULIE HYMAN: And given all of that, you are sort of looking at longer term trends that maybe are going to be somewhat agnostic, as all of that's going on. They might trade lower along with it, but eventually, it seems like the outlook would be stronger for them. I'm thinking about things you mentioned, like digitization, sustainability. I know you're looking at semiconductor makers, as we continue to have a sort of struggle with the shortage in the industry. But also a lot of demand from industries like automakers.

ERIN BROWNE: That's actually entirely correct. I mean, when you think about what the secular trends are going to be that are going to drive the economy over the next 5, 10 years, I think that increasing semiconductor usage in everything is going to increase. So if you just think about your home, we have chips in your cars now. You have chips in your refrigerator. You have chips in your, obviously, your mobile devices.

And I think that that usage of semiconductor chips, is likely to increase over the next five to 10 years. And not only is the number of chips going to increase, but the sophistication of those chips is also going to increase. And it's a pretty limited market, in terms of those semiconductor companies, that are able to produce the sophistication of the chips that are going to be needed for the secular horizon. And so I think that that's a trend that is here to stay.

And it really does tie in to the automation trend and the digitization trend as well. So I think that you taking a little bit of a longer term horizon in terms of your investment portfolio, particularly in an environment where we think there's going to be more volatility, is really the right move for investors.

BRIAN SOZZI: Erin, where else can you hide out? If one is concerned about what happened, what might happen to the markets because of we get three rate increases, four rate increases. Where else can you go?

ERIN BROWNE: I also think that really looking at increasing ESG in the portfolio is also another secular trend that's here to stay. And so if you think about industrial manufacturers, if you think about broader companies, they're all adopting more ESG friendly initiatives. So I think that companies that either manufacture in an ESG friendly way or that are really supplying ESG raw materials, I think are also going to be sort of a secular horizon.

I also think that in an environment where we are continuing to experience volatility, likely due to inflation, I think taking some inflation protection in the portfolio through commodity oriented stocks, I also think makes sense in this environment. And particularly, those stocks like copper that both thread the needle between ESG friendly, as well as commodity exposure, I think are also good investments for 2022.

JULIE HYMAN: We'll be watching all of them. Erin, good to catch up with you. Erin Browne is a portfolio manager at PIMCO. Thanks.