'Economic data continues to be fairly robust': Strategist

State Street Global Advisors Chief Portfolio Strategist Gaurav Mallik joins Yahoo Finance Live to discuss the latest market action.

Video transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Gaurav Mallik. He's State Street Global Advisors' chief portfolio strategist. Gaurav, it's great to talk to you today. Walk me through how you're seeing the state of play right now as we kick off a new month of trading.

GAURAV MALLIK: Yeah, so I mean, we clearly saw a big move in bond yields. We continue to see this sort of-- how should I say this? But like a seesaw occurring, right? That on the one hand, economic data continues to be fairly robust. I mean, it's slowed down a bit.

But bond yields seem to be seeing much lower growth than I think what's been coming out in the real economic data. Part of it I think has to do with the Fed's language as well, right? That they have been directing too much towards transitory, presenting-- especially more recently Lael Brainard, presenting a more dovish view, which has investors confused about what direction the economy is going to take.

From our standpoint, we see a very strong earnings season. We know there were heavy expectations for equities getting in. We don't see that momentum waning. We continue to believe that equities are going to be delivering some good returns to investors in the second half of this year.

Yeah, when we think about kind of what's going on here, obviously earnings are going to be in focus, giving the market something to chew on. But that Fed question does linger in the background, as you're talking about. Still no word-- official word when it comes to renewing Chair Powell's tenure there.

How does that maybe throw a wrinkle into this? Since you're kind of getting the market used to what we've heard from Jay Powell through the pandemic, and the way that the accommodative stance has been reassured. But that could be changing if you do get a mix up.

Yeah, so I mean, if you think about just-- you know, one of the things we track, of course, is that what are equity yields doing relative to bond yields? When you look at that metric and see how that has behaved over the year, yields have come down. We've seen a greater cushion occurring for equity multiples.

I don't see that-- you know, we sort of-- we're definitely-- we're underweight bonds. When bond yields hit about 1.6%, 1.7%, we did some buying. We covered up some duration. As they're getting to these levels, now the question for us is that should we be in a mode where we are selling down more bonds?

So maybe the ones that we bought over the last few months, maybe it's time to lower that rate. In general, we do take the view that Fed is going to be really slow in this. So from both an equity risk premium standpoint, there's a good cushion for investors. And I think if you look at the expectations people have to Q1, very strong expectations for Q2. Companies are delivering on those.

I mean, 88% of the companies are ahead of projections. When you think about the EPS surprises occurs, it's about 5% of the S&P on top line growth. And we're seeing this occur across the board.

And while some concerns about the ISM data which caused bond yields to go down, that's indicative of pretty robust demand as well, right? So that's the way you think about that. We do see the Fed being reasonably dovish as we look out.

AKIKO FUJITA: Gaurav, with that said, what does this all mean for your portfolio? Are you still overweight US equities? Or are you looking increasingly at opportunities potentially abroad?

GAURAV MALLIK: We are overweight US equities. We do like US, US large cap space specifically within that context.

I think the key question for us is what do we do with China? Which is going to be the subject of intense debate. I know in the firm we have several sessions over the next few weeks to figure out what exactly we should make of the recent communication coming out of it.

We do think it's an important place for investors to be in. It's just thinking about what's the right approach to get in and play into that market. So I would say that US for sure remains our big bet. But international buying, we still continue buying maybe a little bit [INAUDIBLE], and maybe just thinking a bit more cautiously about how we think about China within that context specifically.

ZACK GUZMAN: I imagine COVID and where we sit right now has to be something investors weigh around the globe if you are going to look outside the US. And on that front, I mean, we've been debating-- going to be discussing this with Dr. Michael Saag later on in the show. But when it comes to investing around all of this, I mean, how big of an impact is that on your look at some of these other countries, and the rebounds, and how they're differing now, I suppose on a global scale?

GAURAV MALLIK: I mean, it does vary quite a bit. I mean, I think our baseline case remains that the vaccinations will continue picking up and gaining momentum. Some of the countries have a worst [INAUDIBLE], like India is a good example of that, the rates of vaccination have moved up dramatically.

We really don't see a clampdown into lockdowns again. I mean, leaving aside maybe specific regions, or specific parts of Southeast Asia, or a few places here and there in Europe, we just don't think that the economy can withstand that kind of lockdown again. And I don't think policymakers are going to do that.

We're encouraged by the fact that there is booster shots available. We're encouraged by the change in tone both political parties have taken in the last few weeks, encouraging people to vaccinate in the US. And that's not just a US phenomenon. We've seen that occur in every part of the world.

So we think that policymakers will lean on aggressively moving forward with vaccinations and thinking about the strategy for the most vulnerable on booster shots. That's the approach they're going to take. And we don't see it significantly impacting what occurs in terms of the global economy, or in terms of slowing down the base of either revenue growth or EPS projections as we look out at the rest of the year.

AKIKO FUJITA: Gaurav Mallik, State Street Global Advisors' chief portfolio strategist. It's good to talk to you today. Appreciate the time.