Principal Global Investors Chief Strategist Seema Shah joins Yahoo Finance Live to discuss how investors should approach 2022 given the current market trends.

Video Transcript

- Joining us now is Principal Global Investors chief strategist, Seema Shah. Seema, great to have you on the show. And thanks for being with us. I want to start with the Fed, bounce off of what Brian was just saying. How many rate hikes do you think we're in for this year?

SEEMA SHAH: Hi. Thanks for having me on. We are expecting three rate hikes this year and another two or three next year. So we have to keep in mind that, actually, even four rate hikes-- so one rate hike per quarter-- is actually-- was a very, very normal and standard kind of process of tightening in previous cycles. So although it sounds very, very sharp, it's actually-- it's not as steep as, maybe, it sounds, and certainly not steep compared to previous cycles.

- So do you think that it's going to really dent economic growth or even consumers, because their-- consumers already dealing with paying more for just about everything? And now, you know, borrowing money is about to get more expensive.

SEEMA SHAH: Yeah. You know, clearly, the Fed's intention for raising rates is to slow down some of those inflation pressures, take out a bit of the heat in the economy. So yes, you know, likely, things will become a little bit tougher.

But in terms of really drastically slowing, that is not the Fed's intention. And as I said, four rate hikes-- it's generally quite a gradual process of tightening. So we do think that fundamentals for the US economy will remain pretty solid through 2022 despite all the tightening that we're anticipating.

- Now, we know that 2022 is off to a pretty lousy start, the biggest, I think, and the longest sell-off we've seen for stocks since September. And now we have the NASDAQ in a formal correction. What do you do with big tech right now? And do you think that investors should be seeing these big drops as opportunities to re-enter the market?

SEEMA SHAH: Yeah. I see-- I think what we've seen this year, because we've seen such a sharp spike in bond yields-- and really, it's been driven by real yields-- this is when times get a little bit more challenging for big tech because they're so dependent on that kind of direction.

Now, on top of that, it's a slightly more challenging environment from the cyclical side, as well, because we are looking at a relatively stronger growth path that, kind of stay-at-home trade from two years ago. So it's-- generally is quite fading.

Now, what we do think, though, is that as economic conditions start to slow down this year-- so we are anticipating a slow economic growth rate-- you do need to see balance sheets which are very, very strong. So at this point, although technology has been heavily hit, we have to start discerning between the big tech names and some of those companies which are actually the technology, but they don't generate much profit. We want to see companies with strong pricing power and the significant profit margins and the ones that can really continue to deliver earnings.

So from that perspective, although this is quite a challenging time, we do still have some faith in mega-cap tech names, especially from a stability perspective for your portfolios. So we do think it's-- it makes sense to have a bit of an allocation-- of course, not as much as maybe it was the case a year or so ago. But there is definitely a position for portfolios for big tech.

- And is there a position or should there be room in the portfolio for things like crypto and NFTs, even though we know they come along with lots of uncertainty and lots of volatility?

SEEMA SHAH: You know, for some investors who will be looking, you know, it is difficult to find returns in this kind of market. We are looking at a period ahead, which is going to be higher volatility, low returns. So it's going to make sense investors are looking a little bit more creatively outside of your more traditional asset classes.

For us, I think NFT is the-- kind of the-- the bitcoins are still a little bit too volatile for these portfolios. You know, we're looking for more stability. But we do think that, you know, you can look outside your traditional equity. You can look outside traditional fixed income and start thinking about alternatives and your private credit. And that's where you can see greater gains, but with not as much volatility as you may see from some of those cryptos.

- Want to get back to inflation, which seems to be the number one concern for investors this year, as it was for much of last year-- what do you think the key is to easing supply constraints, because we know that that has played such a big role in pushing prices higher-- that and, I guess, labor shortages?

SEEMA SHAH: Yeah. It's been really key. And I actually-- I would say that they're very much related. It's-- so supply chain constraints have being created because of the lack of labor supply.

Now, going forward, although the current COVID wave may start to stand in the way, a little bit of a hurdle going forward, we are starting to see signs that some of those supply chain constraints are easing. And especially with vaccination rates rising in so many parts of the world, we do anticipate that COVID tolerance is going to increase. And as that happens, you shouldn't see major shutdowns of factories every time that there's a bit of an outbreak of COVID. And that should-- over time. You know, this isn't going to be quick. But there should be a gradual normalization of supply chains. And as that happens, then we will see the fading of some of those most acute price pressures that we've been seeing over the last couple of months.

So as we look at inflation forecast for this year, we do still see it elevated for the first half of the year. But then come into the second half, we actually start to see it fading to settle it around the 2%-- sorry, around the 3% level by year-end. So it's still above where you've had it for over the last decade, but certainly not as worrying as some of the numbers we've become accustomed to in the last few months.

- All right. We're going to have to leave it there. Seema Shah, thanks so much-- appreciate your perspective today.