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Market selloff is ‘a reaction to the uncertainty,' strategist explains

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BNP Paribas Asset Management's Daniel Morris joins Yahoo Finance Live to discuss various factors contributing to Friday's market drop.

Video transcript

AKIKO FUJITA: But let's begin with the market rout that we're seeing, pretty much a sea of red here but I want to point out some key outliers that we're seeing in this session. Remember those stay-at-home trades we saw emerge in a big way at the height of the pandemic? Well, those are seeing some big gains again today. We're talking about names like Zoom, Peloton, Netflix, Teladoc, those are all up in a big way. And then at the very bottom, Clorox here, up more than 3% on those fears of this new COVID variant.

Let's bring in our first guest for the hour. We've got Daniel Morris, BNP Paribas Asset Management chief market strategist and co-head, Investment Insights Centre. Daniel, I know you've been watching this big sell-off today, make sense of it for me, you think it's a bit of an overreaction or justified given the uncertainty around this new variant?

DANIEL MORRIS: Well, I think it's a reaction to the uncertainty and if we think back to the rally that we had in Treasury yields prior to the last wave of COVID, and initially when yields started falling, we were looking for explanations for why that might be happening because at that point in time growth was good, we were optimistic on the infrastructure packages being passed, and some people proposed then that it was the new variant of Delta that was causing the fall. And initially weren't so sure, but in retrospect, that turned out to be it. So I think the lesson this time is the markets are reacting much more quickly just to the threat of another wave. We clearly are going into the winter and it does seem at this point anticipating the potential problems as opposed to waiting to see if they're confirmed.

KARINA MITCHELL: And so what's your risk appetite now, sir, do you jump in and pick up some of these discounts at this point? And particularly, what do you do with stay-at-home trade, do you think that's something that's enduring or is it short-lived?

DANIEL MORRIS: Well, at this point, we're waiting to see what happens. Clearly, it's just one day and, of course, we appreciate it is Thanksgiving week. That said, going into this our allocation has been overweight risk and overweight equities. So we think even anticipating, expecting if you will, some setbacks as you inevitably do, we think the broad trajectory is for recovery and growth. Even if we do see restrictions reimposed, the lessons that governments really have learned over the last two years about how hopefully to institute measures that will help on the infection side, and on the pandemic side will try to minimize the economic impact, suggest to us that even if we do see a slowdown now because of this latest threat to the variant, we don't think at all that it's going to fundamentally derail the recovery that's taking place.

AKIKO FUJITA: So it sounds like you think governments will take more of a measured approach when you compare it to what we saw back in 2020? You said you're overweight risk, what particular sectors are you liking right now?

DANIEL MORRIS: Well, allocations are more to countries and really trying to pick up the cyclicality or where we see the countries or the regions that have the potential on that front. So for example, we do have an overweight to Japan, which generally has a high beta to cyclical movements in the market, which is fundamentally where we think we are. We've added to our allocations to emerging markets again, partly cyclicality but partially, the attractive valuations that you have now in EM given that you've had almost a full year of underperformance. And then overall to the US, which kind of gives us a growth bias. Obviously, may be a little bit more painful today but we do think the medium-term outlook is still supportive.

KARINA MITCHELL: And then for those who are looking for some sort of safe haven, the bond market seems to be the place to turn, but where are other areas that you think people should be looking at right now?

DANIEL MORRIS: Well, certainly primarily Treasuries. Honestly, Bunds are another area that we think will hold up well in this environment. Gold also is generally one of the safe-haven assets. I think it's not going to be dissimilar to the patterns we've seen during previous waves, previous concerns around the pandemic. It's just going to be a question of how long we think it's going to last before things reverse again.

AKIKO FUJITA: Daniel, you mentioned your exposure overseas, how are you looking at a place like Europe because you know, when you think of before these most recent waves and restriction that we saw over in Austria, I mean, this was seen as a relatively stronger recovery story. Has that completely been slowed down, derailed, how do you assess the opportunities in Europe?

DANIEL MORRIS: Yeah, we really just see it as frankly yet another setback that we've had over the last two years with the pandemic. But we're really trying to focus on the medium-term outlook. And I think when we look at Europe, where actually we've increased our allocation recently. That was premised on the fact that still, we do anticipate reopening, albeit perhaps a bit delayed now. Don't forget you still have the next generation EU funds that are going to be paid out this year. That's been a bit delayed. That may turn out to be a benefit given that you're going to have that fiscal stimulus feeding through next year.

And don't forget, Europe has only lagged US equities by a relatively small amount this year. They've held up quite well. But if you look at the valuation gap, it's much, much higher in the US. So the question is we kind of assume there's this growth premium for US equities and there is, and we're kind of questioning whether that big of a premium is necessarily warranted. So also looking at or anticipating better performance for European equities into next year even with what will likely be a bit of a pause between at least now and the first part of next year.

KARINA MITCHELL: And then equity is not the only sector taking a hit, the oil space is you know, has come tumbling down as well. What does that do to the inflation outlook and then how bullish are you on the energy sector yourself?

DANIEL MORRIS: Generally speaking, overweight commodities. Anticipating kind of our supply, demand imbalance to persist. Right now, of course, you're going to have a bit of a pullback or an anticipated pullback on the demand side, nonetheless, that should recover, we've seen these swings in travel stocks and transportation already several times. So this is going to be a leg down but we anticipate that will come back. And then the question will be to what degree this feeds through into inflation expectations.

I think probably one of the key questions right now, over the last week we've had comments from members of the FOMC about the possibility of accelerating tapering and potentially bringing us to the point where the Fed starts hiking rates sooner rather than later. But with this news, it frankly could be the opposite. So we're going to be evaluating like all investors, the balance now between, on one hand, the supply and demand pressures that we've had and the effect of that on inflation, but whether with this new variant if more restrictions do need to be imposed, clearly, that's going to pull back at least on some of the demand, reduce those inflationary pressures, and reduce the pressure on the Fed.

AKIKO FUJITA: Daniel Morris, BNP Paribas Asset Management chief market strategist and co-head Investment Insights Centre. Good to have you on today. Appreciate your insight.

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