Inflation will be ‘biggest risk to investors’: Advisor

Alex Shahidi, Evoke Advisors Managing Partner & Co-CIO, joins Yahoo Finance’s Kristin Myers to discuss inflation concerns, rising yields, and market risks.

Video Transcript

KRISTIN MYERS: Checking market action right now, the S&P 500 and the NASDAQ remain the only two major indices in the green. The Dow is down right now about 4/10 of a percentage point. As the Dow remains under pressure, we are seeing financials taking a hit. Financials had been leading in the trading sessions earlier this week. Financials, however, down right now about 1%. So I want to bring in Alex Shahidi, Evoke Advisors managing partner and co-chief investment officer, to talk about the market action that we have been seeing.

So Alex, always great chatting with you. I want to start on those bond yields, right now down about 3/10 of a percentage point. They had, of course, bounced off of their lows a little bit earlier in the trading session. Now when we consider that 10-year bond yield, just looking at year to date, it has risen-- everyone can see that chart-- pretty rapidly, pretty quickly. How concerning is that to you? And how much should investors be concerned or worried about these inflation risks going forward?

ALEX SHAHIDI: You know, it's really interesting. That picture is literally the mirror image of what happened a year ago in Q1 of 2020. Yields dropped about the same as they're rising today. And what caused them to fall was collapsing growth, deflation pressures. Concerns about going into Japan style deflation or depression were real as the pandemic emerged and interest rates collapsed. Treasuries were in a bull market. Equities and commodities got crushed.

And now it's the opposite. So we're emerging from the pandemic. Inflation pressures are starting to rise from the lows. Growth is picking up. Fiscal stimulus continues. And so concerns have now shifted to maybe inflation and growth. And as a result-- and makes sense-- interest rates have risen almost a round trip from where they were to begin 2020. And treasuries are doing poorly, but things like commodities are doing really well, as you would expect.

So I don't think it's too concerning. I think we're kind of just going back to where we were. And really, the way we think about all this is within a risk parity type of framework is own assets that do well in different environments so that you're not blindsided by some of these massive moves that we're seeing.

KRISTIN MYERS: I definitely do want to get to that in a moment. Wondering what you think are the biggest risks to the market right now. Investors, as we've seen in some surveys, have been pointing at the Fed and at interest rates as some of those biggest risks. Do you agree with them?

ALEX SHAHIDI: Yeah, I think that makes sense. But also I would throw in there the risk of inflation. Because the Fed has already said we're going to keep rates at 0 for an extended period of time. We're going to keep printing money. There's going to be more fiscal packages. And the push is to create inflation because the biggest concern, at least for the Fed, is, we don't want deflation. We know that's really hard to reverse, as Japan's were going through the last 30 years and Europe for the last decade.

And so the push is to create inflation. They have the willingness and the power to do it. And I'd say that's the biggest risk. And the reason I say that is because, you know, we're a $20 billion RA. Manage money for institutional high net worth clients. And most investors are underweight inflation hedges. You're starting to see talk of inflation. It's one of the most googled terms today. But portfolios are heavily underweight inflation hedges. And so I'd say that's probably the biggest risk for investors.

KRISTIN MYERS: All right, let's talk to-- about that point that you were making about those allocations in the portfolios, essentially mitigating some of those downside risks. What are you looking at in 2021? If you're an investor watching us right now, how should you be considering allocations in your portfolio right now?

ALEX SHAHIDI: Yeah, we think of it in this risk parity type of framework. And what I mean by that is own assets that are biased to do well in different economic environments, so certain things that do well when inflation is rising and others that do well when dual inflation is falling. And the same with growth-- rising growth, falling growth. So a year ago, you had falling growth, falling inflation. Now you have rising growth, rising inflation. And that could shift again.

And so, own assets like equities, which most people own, but own things like commodities, which are one of the best things for this year. Own things like gold, even treasuries and TIPs. Inflation-linked bonds look attractive. Yields have gone up so these have lost money. But the yields going forward are more attractive.

KRISTIN MYERS: Alex, I really want to quickly ask you, what are you anticipating in the short term? Are you anticipating a lot of volatility? And do you view those dips as buying opportunities?

ALEX SHAHIDI: Yeah, dips are usually good buying opportunities. You know, it goes back to buy low, sell high. And as we know, that's hard to do. I'd say things that are heavily underweight in portfolios are those inflation hedges again. And again, within this risk parity framework, you want to own those inflation hedges all the time, and I'd say particularly now. So I see inflation pressures picking up, and I see portfolios that are heavily underweight of those. And so I'd say those are the near term focuses for us, particularly on the commodity side.

KRISTIN MYERS: All right, Alex Shahidi, Evoke Advisors managing partner and co-chief investment officer, always a pleasure. Thanks for joining us.