Pressures on inflation are 'coming from a number of angles': HSBC Private Banking and Wealth Management CIO

HSBC Private Banking and Wealth Management CIO Willem Sels joins Yahoo Finance Live to discuss the latest market action.

Video transcript

ZACK GUZMAN: I want to turn to the markets, though, for what all that Fedspeak means as we all see all three indices in the red here to start us off this week. Of course, a lot of it stemming from those inflation fears, but what does it mean if we are to believe the Fed and their stance? For more on that, I want to bring on Willem Sels, HSBC Private Banking and Wealth Management Chief Investment Officer joins us once again.

Willem, good to be chatting with you today. Let's just start on that point, because in your note, you seem to agree with Jerome Powell there talking about temporary ticks up in inflation over the next few months as we compare to last year, but overall kind of evening out at normal ranges. But how close are we to maybe not seeing that play out? I mean, what is maybe the percentage chance that we deviate from that and the risks that investors should be building in now?

WILLEM SELS: Yeah. Who am I to disagree with Mr Powell, of course? Well, we are seeing pressure on inflation. And that is coming from a number of angles-- number one, the consumer, who is potentially going to spend much more than before, especially those that indeed kept their jobs. They have been saving over the last few months that they couldn't go out and spend.

So if they start to spend a lot, that could lead to some bottlenecks, and people going to the same concerts, people hopping on the same planes. That leads to price increases. So one way to manage that in portfolios is by being exposed to that sector-- to the consumer discretionary sector. It could also come that inflation from importing inflation, bottlenecks in the supply chain. And companies are trying to solve that through the off-shoring.

So again, you can benefit from that by investing in automation, because, clearly, if you re-onshore, you will have to automate. We also think that generally, if inflation is going up temporarily, it would be because the US economy is stronger than expected, and therefore, small caps and mid caps tend to benefit from this because they tend to be a bit more exposed to the local economy. So we can manage it.

We think it's a temporary phenomenon. We are going to get a very interesting CPI reading tomorrow, where we may even jump from 1.7% to 2.5% in just one month. But still, we think it's going to be temporary, largely because of these effects on oil and, indeed, those effects of the re-opening.

AKIKO FUJITA: Willem, I wonder what you make of the patience with which the Fed chair is approaching the inflation picture. He made it pretty clear yesterday-- look, we're happy to see inflation tick up, and we feel comfortable acting only after we see it go up because of what they have seen play out over the last 10 years, let's say, where inflation just simply hasn't ticked up. Do you agree with that assessment? And when we talk about sustained inflation, what do you think that looks like?

WILLEM SELS: So typically, the Fed wouldn't act on base effects. And by base effects, we mean oil prices simply being higher than last year, as inflation is a comparison of prices today versus last year. Remember, last year, oil fell dramatically, and so therefore, it's just basically a mathematical comparison. So once we start to have that behind us, then the question is, what are the drivers that can continue to lead to inflation?

And typically, you can't get sustained inflation unless you get wage growth. And wage growth is obviously limited by two factors. Number one, we still have high employment. So we would say we have big slack in the US economy. And that needs to be absorbed before you can get significant wage growth across the board. And then secondly, although manufacturing may be getting more localized as we re-onshore, services probably have become even more global.

We are now on Zoom or on Teams. And we can do our jobs, frankly, from-- largely from anywhere in the world. So we are more and more competing with those workers in other regions of the world. And that should keep wage inflation low as well. So that's why the Fed is looking at that longer term prospect where that inflation remains quite low. And therefore, they can afford to be quite slow in terms of policy normalization.

ZACK GUZMAN: Yeah, it sounds like as long as the market's bracing for some of those big jumps up over the next few months, everything is going to be fine, I suppose. But when you move on to the other thing people are watching, earnings season, of course, also going to be very interesting when we think about comps to last year. You noted, kind of pairing both of those things inflation fears with where we're at and earnings, you like bank stocks-- that sector as one to watch.

But how else should investors be playing it if those are the two things that are top of mind? Where do you put new money to work here moving forward?

WILLEM SELS: So we're trying to look for those natural hedges where if it is, indeed, that stronger economic growth that we're going to see of 6% in the US this year, that stronger growth that drives the inflation-- that stronger growth is probably going to come from the consumer, and therefore, we like consumer cyclicals, because the earnings there should do well if the consumer gets out and spends so much.

Secondly, in the financials-- why? Because they are a cyclical sector indeed. Lending growth is probably going to accelerate. And also what you're starting to see is the non-performing loans starting to drop, or at least the provisioning made by banks seemingly having been exaggerated over the last couple of quarters. So they are in the fortunate position of being able to write that back-- some of them also probably going to start paying dividends again.

In terms of the rotation, we wouldn't give up on technology. We see very strong growth there. You mentioned health technology. There's also 5G. There is automation. And it's not because the economy recovers that you need to get out of technology. But indeed, the improving prospects of these other sectors allow you to diversify a little bit more.

And that obviously, then, if you do that, that also makes your portfolio less sensitive to-- you know, there's upward pressure on bond yields if those continue to be quite volatile. So it's trying to remain exposed through these two or three months that you're going to get those volatile inflation readings, but remaining optimistic about growth, and remaining also invested in some of the longer term themes such as technology and sustainability which we haven't talked about.

AKIKO FUJITA: Always good to get your takes there-- Willem Sels, HSBC Private Banking and Wealth Management Chief Investment Officer.