Investors will know about Fed tapering long before it takes place: strategist

Gargi Chaudhuri, Americas Head of iShares Investment Strategy at BlackRock, joins Yahoo Finance Live to discuss the outlook for inflation and what’s next on the Fed’s agenda.

Video transcript

MYLES UDLAND: Let's turn our attention now back over to markets and sort of this odd moment that we're in, and talk about some of the things that are on investors' mind these days. Let's bring in BlackRock's Gargi Chaudhuri, the Head of iShares Investment Strategy for the Americas.

Gargi, thanks so much for jumping on this morning. I know that there's a lot of stuff with respect to inflation and longer-term pressures that you guys are watching. But I do just want to start by asking how you've thought about the role of retail in this market and the way that it has caused some distortions, and if you've seen any flows data on that or just how you've thought about it as part of your strategy process.

GARGI CHAUDHURI: Absolutely. And I would say, first of all, thank you so much for having me. And secondly, look, as you were discussing earlier on in the show, there has been a rise in retail. We welcome all participants in the market. I think it's great that we are at a juncture where we are not thinking about investors as a certain type who can play in certain areas of the market. We think about all investors as investors that have an idea of where they want to make money. I think ETFs do an incredible job in democratizing investments. Everyone has access to the market via ETFs in a transparent, liquid, and very affordable way. So this is something we welcome.

JULIE HYMAN: And Gargi, when you're watching the flows that we're seeing-- I know that you have been watching a lot of inflation-related activities when it comes to exchange traded products. We're showing there some of the exchange traded product flows that we have seen. And they have been-- there have been quite a few of them. Are we seeing most of it into sort of inflation hedge products? What kind of strategies are you seeing at play by investors here?

GARGI CHAUDHURI: Of course. So first of all, let's talk a little bit about the backdrop of why we're seeing the flows pick up in inflation. So as you all know, we've been polling for inflation to pick up. And we saw that in the recent CPI print, the consumer price index. We saw that in the PCE, which is the Fed's preferred measure of inflation.

And there are reasons to believe that inflation is going to pick up for the more shorter-term-- so the more transitory inflation, if you will. And then for the medium-term as well, given some of the Fed changes that they've introduced in terms of their inflation goalposts. So with that in mind, investors obviously have been gravitating towards areas in the market where they can get hedged if inflation does pick up.

So what are the parts of your portfolio that will do well if inflation does indeed pick up, as we've seen in the data and as we forecast? TIP, T-I-P, which is the ETF that hedges for Treasury inflation security-- Treasury inflation protected securities-- as well as shorter data TIP, S-T-I-P, have seen a tremendous amount of influence. Again, what investors are trying to do here is get paid in their principal when inflation picks up.

We've also seen this across the equity markets as well, where there's been a rotation into sort of small caps, into more of the cyclical names, into value stocks, all of which tend to do well when inflation picks up.

BRIAN SOZZI: And Gargi, just given this-- given all this focus in inflation-- we'll likely focus in on again tomorrow with the jobs report comes out-- do you think the Fed is running the risk of potentially spooking the markets this summer as they start to talk about potentially tapering bond purchases?

GARGI CHAUDHURI: Yeah, talking about talking about, right? So look, I think that the Fed has done an incredible job in terms of ensuring and assuring the markets that they will signal far ahead of when they are actually going to make a move. So I do think that investors will know about any plans to taper long before they actually stop the tapering process.

I think what we should all be watching are for how the economy improves as for their goals. And they've been very clear around that. They've said that they're looking for a very inclusive way of judging the employment. It's not just looking at that U3 unemployment rate, but really looking at various other measures, such as how-- what is women's participation rate? What is the unemployment rate for Black and Hispanic workers, et cetera?

So we're going to look at that very inclusive unemployment picture, as well as being a little bit tolerant or welcoming of inflation, that if it moves higher for transitory reasons related to the restart of the economy as we're all participating in right now or if it's related to supply disruptions, I think they're willing to look through that for the near-term.

MYLES UDLAND: And then Gargi, finally, before we let you go, I just want to ask about a couple of sectors that you guys have seen as inflation hedges in the past, particularly homebuilders, just because we have such an interesting moment in the housing market. It seems everyone wants a home. No one can find a home. Home prices are up.

But the fundamentals of the space in terms of mortgage applications, housing starts-- all those are quite challenged. It really is a fascinating market individually. And I'm just curious how that fits in in this kind of environment.

GARGI CHAUDHURI: Yeah, so I would say that-- you know, obviously more recently we've seen some of the mortgage application numbers decline. But I think if you look back over a period of time, all of the housing indicators have been really positive. Some of the moves that we have seen that we've all perhaps experienced in terms of wanting more space as we spend more time at home-- that is something that's going to probably continue to be good for the housing market.

Again, the other big thing that we look at is household formation. That is something that is going to, again, be very positive for the housing market in the long-term. And those are the reasons why we think focusing on that sector of the market continues to make sense for investors that are looking for a more medium-term investment opportunity.

MYLES UDLAND: All right. Gargi Chaudhuri, Head of iShares Investment Strategy for the Americas over at BlackRock. Gargi, thanks so much for jumping on this morning. Really appreciate the time.