‘Markets are very sanguine about the future inflation prospects’: Research Affiliates CIO

Chris Brightman, CIO at Research Affiliates, joins Yahoo Finance to discuss the outlook on the rotation out of growth into value stocks, inflationary pressures, and the global minimum tax.

Video transcript

ALEXIS CHRISTOFOROUS: Let's stick with this conversation about the markets and bring in Chris Brightman. He is CEO at Research Affiliates. Chris, good to see you. I'm going to ask if this rotation out of growth and into value has sort of peaked, because we've been seeing some more interest in those high growth tech stocks. What are you doing personally?

CHRIS BRIGHTMAN: Well, what we observe is that we've entered a sweet spot for value investing. What I mean by that is that the difference in valuation between growth stocks and value stocks is still near all-time highs. Of course, value stocks always trade at a substantial discount to growth stocks, but the amount of that discount varies enormously through time.

And we had reached the point several months ago, maybe even six months ago, where we were literally at the all-time high discount for value stocks versus growth stocks. And while we've had a tremendous period of outperformance for value over the past six months, we remain near all-time highs in how cheaply value stocks are priced to growth stocks. But now we have positive momentum. So the prospects for a continued rotation look pretty darn good. That said, forecasting stock prices over periods of days, months, and weeks is a fool's errand.

KRISTIN MYERS: I know. Despite how much we try, we always like you guys to pull out your crystal ball with some degrees of success. So Chris, I do want to ask you about some of the inflationary moves that we've seen lately. Yesterday, those CPI numbers that came out. Obviously inflation running pretty hot.

I would have expected tech to take a leg lower, and I actually would have expected the markets to take a leg lower for yesterday. We did not see that. Even right now the Dow is the only index in the red. So how are you reading this inflation narrative moving forward? Are the risks overblown? Is it clear to you that some of these moves are transitory?

CHRIS BRIGHTMAN: Well, it's crystal clear that the market is pricing them to be transitory. I think we have to be humble about our ability to forecast really what's going to happen because we've never seen this before. We never intentionally closed down huge portions of the global economy, simultaneously providing enormous quantities of stimulus, literally the Treasury wire transferring money into peoples' bank accounts on a regular basis, and then go through the reopening.

It's absolutely the case that there we would expect a huge spike in inflation, and we just saw that. Year over year, 5%. If you go month over month, that's 7.5%. That was certainly more than forecast. But everybody understood that any point estimate of the peak of inflation was just a guess and that everybody was anticipating and was prepared for transitory high inflation numbers. So the truth is, we just don't know.

What I would say, though, is you don't need to be worried about price spikes from bottlenecks with the reopening of the economy. That's normal. No concern. If we start to see, however, a permanent increase in government transfer payments that isn't paired with increases in tax receipts necessary to fund those transfers, that's the sort of thing that ought to cause one to be concerned.

Right now, the Fed has told us they're not doing anything until 2023. And so all eyes are on Congress. And with Joe Manchin holding the purse strings, I think markets are very sanguine about the future inflation prospects.

ALEXIS CHRISTOFOROUS: Well what do you see as the biggest upside risk for the market going forward? Would it be higher taxes, legislation from Congress? Or we know that the G7 leaders are talking about a higher corporate tax rate across the board, 15%. Would that be the thing that would trip us up?

CHRIS BRIGHTMAN: Oh, I think we need more tax revenue. So the discussion of a global minimum tax, discussions of tax simplification and increased tax enforcement, if any of that moved from idle discussion to actual policy and implementation, that would be all to the good.

ALEXIS CHRISTOFOROUS: And before we let you go, real quick, do you see any opportunities outside of US equities right now on the international stage? And if so, where?

CHRIS BRIGHTMAN: Yes. I mean, look. We're very home-biased in the US. We focus on everything going on in the US and don't pay a lot of attention to the rest of the world. But the rest of the world matters a lot, and it's just beginning. This reopening of the global economy and the resulting reflation trade is very early on.

So I think there is a lot of room to run for small outperforming large, value outperforming growth, international outperforming domestic equities, EM, particularly EM currencies outperforming developed. I think we're going to see for the next year or two those are the trades to have on. Those are the themes. Those are the structural factors that are going to be driving prices.

ALEXIS CHRISTOFOROUS: All right. Chris Brightman, CIO at Research Affiliates. Thanks for being with us today.