Volatility in Bitcoin is too high to justify a strong place in your portfolio: Strategist

Gaurav Mallik, State Street Global Advisors Chief Portfolio Strategist, joins Yahoo Finance Live to discuss outlook on the Fed, biggest risks to the market, and crypto’s volatility.

Video transcript

- I want to keep this market conversation going. We're joined now by Gaurav Mallik, State Street Global Advisors chief portfolio strategist I want to start here with cryptocurrency, just because it's where Jared started. And I feel like we're chatting about cryptos almost on a daily basis. Is this, right now, something that-- if you missed that dip yesterday, something that you should hold off on purchasing-- perhaps you should hold off on purchasing-- until we have one of those ETFs, those cryptocurrency ETFs, out, perhaps now as soon as the fall? Or is this an asset that you're looking at, and you're saying, right now guys, I don't think you should touch it?

GAURAV MALLIK: I think it's good to wait for diversified exposure. So I think the ETF is one part to think about. The thesis gives you more exposure across the-- across the asset. As we think about its role in the portfolio, increasingly we think there is a place for Bitcoin in it. But frankly, we do prefer classic hedges around inflation. That would be gold, precious metal, commodities, real assets. So from a volume, liquidity, all that standpoint, we prefer those.

The volatility in Bitcoin unfortunately is just too high to justify a strong place in your portfolio. At least for most institutional investors, that's what we'd be telling them.

- Want to turn to the broader economy now and what we heard out of the Federal Reserve, which really rattled investors last week. Now expecting interest rates to start rising sooner than expected, possibly by the end of 2022. Does that have you looking at your clients' portfolios any differently? Are you making some adjustments now because you have a little bit more clarity on where and when interest rates are headed?

GAURAV MALLIK: I mean, if you look at the reaction that occurred, the reaction was a bit of what I would call a hue, right? So we saw a move in volatility. We saw a move in rates. And then everything seems to have come down since then. Frankly, I mean, the rates market-- flat [INAUDIBLE] was probably the place where we saw the biggest action occur. Most of the other asset classes, we did not see too much happen. Or whatever happened reversed after Jeremy Powell's testimony on-- on Monday.

From our perspective, we've been a bit more exposed, or increasing exposure, to non-US assets. We're still keeping a position in US large cap. We're really looking to diversify equity exposure across the other assets. Within that context, in some ways, the more hawkish tone that the Fed took encourages us to look more outside. So the PMIs that came in today tell us that Europe is doing fantastically, in fact, really well-- highest PMIs over the last 15 years.

In the US, we have a situation where the Fed is sounding hawkish. The ECB is not sounding hawkish at all. So you have openings occurring-- so reopening trade is going to continue and gain momentum in Europe as we get through Q3 and Q4-- and still very loose monetary policy, plus the need, desire to do more fiscal spend. So on balance, it gets us a bit more conviction in our calls around either Europe, or later, around EM post-- post hawkish comments that the Fed made.

- I was reading your notes. And you say that the market, right now, is vulnerable to shocks. Curious to know, you know, what you're perceiving as some of the biggest risks right now to the markets. And really, how should investors really think about protecting their portfolios against some of those risks and against some of those potential shocks?

GAURAV MALLIK: So I think there's two places of risk that we particularly focus in on. One is on inflation, right? So even though, you know, there has been this stark and this notion that-- that bulk of the inflation is likely to be transitory, however, what does transitory mean? Does that mean it's going to transition off in one month, three months, six months, nine months? And when nobody sees the risk of runaway inflation, as-- as Jim Powell was talking about on Monday, we think there's a difference between long-term expectation inflation's going to be just around 1.5%, 2% to something slightly higher than that.

So I think inflation is one thing that we would say is a risk. And there are various ways to hedge that. I think, you know, everything from long-duration bonds to some extent-- but also, clearly, could the commodity complex be valid, some exposure to gold, real assets? So I think that's one area where there is some concern.

We also do need to recognize what may occur with either the Biden plan, the fiscal spend, corporate taxation. Those are other areas which could spook markets. There is, of course, impending potential for regulation around the tech sector-- so a few other things that investors should think about, leaving aside, of course, anything that may occur on the geopolitical front. I mean, we clearly see no abating of tensions between US and China, COVID. I mean, so there's a few other factors I would-- I would think too. But I think top of mind right now would probably be some combination of inflation or the concern around taxation and how that might affect earnings.

- You mentioned China there for a moment. And before we let you go, I would like to get your thoughts on-- on China as an investment vehicle for-- for US investors. I understand that you see value right now in that stock market. Why?

GAURAV MALLIK: I think there's two things we like about the Chinese market. One, as you rightly said, you know, with-- you know, the Chinese market is up about 2%, 2% and a bit this year. So it's lagged quite a bit as you look at year to date performance. There was a reduction of the Chinese credit impulse, tech regulation. So all those things are now behind us. And to us, it feels like they're in the price. And as you look at the latter end half, we do see the prospect of there being some fiscal spend. So one is on valuation and growth prospect.

And the other thing is that with all the tensions around sanctions, all these things, we continue to see strong demand for Chinese assets. So it's like people seem to like China because it's increasingly what I would call desynchronizing from the rest of the world. So the rest of the world, for the most part, is still in a losing mode. China is beginning to think about tightening as you look at the first half of this year.

And when you add it to your portfolios, over time, we've seen Chinese correlation with the US assets or equity markets rise up to as high as 80% to 90%. Today it's sitting at about 50%, 55%. So it's a really nice add-on to your portfolio both from an equity standpoint and from a debt standpoint. You get much better, higher yields. So both sides-- valuation, but also the fact that it's more decentralized, which means it really is a nice diversified in a portfolio. But increasing assets tend to get more and more correlated, driven by macro effects that we were talking about earlier.

- All right, we will have to leave that there. Gaurav Mallik, State Street Global Advisors chief portfolio strategist, thanks so much for joining us today.