As markets assess the possibility of inflation reigniting, Kathryn Rooney Vera, StoneX chief market strategist, joins Morning Brief Hosts Seana Smith and Brad Smith to discuss how to hedge against the risk, namely diversifying into "underloved" sectors. Rooney Vera outlines that geopolitical conflict, China’s central bank’s recent stimulus package, and the easing of monetary policy around the world as possible risks to inflation. “Ultimately, inflation expectations do not correspond with the potential for a re-acceleration in inflation.” She says, “What I’m advising our institutional clients is to protect your positions. Protect your interest rate-sensitive sectors, such as tech, with the purchase of put options. While those options are cheap, while volatility is low, and it’s cheap to protect yourself.” “Industrials and manufacturing are likely to see an uptick from contraction to expansion if we avoid a recession here in the United States, which is ultimately my base case scenario. So as we’re seeing, manufacturing [is] in contractionary territory. But given the monetary easing and the beginning therein of this easing cycle, I do suspect we’re going to crack expansionary territory over the next 12 months.” She says the strategy of playing an underperforming sector has worked out well so far this year. “Coming into 2024, utilities was my top pick in terms of the S&P. That was way out of consensus because this was the most battered and most unloved sector. [It’s] not a sexy kind of defensive historically, but that was our top pick and it’s done very, very well. Up 30% year to date.” Rooney Vera notes that she thinks the utilities play is done, given the significant appreciation, but says healthcare could be the next move. “I think it’s time to realize those gains and to rotate into the next underloved, underperforming sector, which is also defensive. It doesn’t have the same attractive properties as utilities, but I think healthcare could be one of the sectors that does well in 2025, especially if we do get some accumulation and some erupting of these underappreciated and underpriced risk, not only just on the geopolitical side but also on the economic and political side.” On the AI trade, the strategist says she thinks “we’re in a mature phase. She adds, “I’m looking for second derivative plays. And that’s part of the reason why I recommended utilities. But I also like industrial real estate because this is a second derivative trade on AI that can benefit from its ongoing development.” “I do love playing second derivative trades on the AI perspective, as well as diversifying into underloved sectors because the truth is, AI really does improve productivity and efficiency, lifting many boats. So why not broaden out our exposure to other sectors?” Following last week’s better-than-expected September jobs report, some expect the Federal Reserve will slow down its rate cuts. Rooney Vera says, “They’re likely not going to be as aggressive as the market had previously anticipated. And if the economy does effectively avoid recession, which it seems poised to do with the US consumer being so robust… while companies are hiring less, not engaging in mass layoffs. That, to me, says that the Fed is not going to slash rates. There’s no need to do so. In fact, if they were to cut rates aggressively, I’m talking 200 to 300 basis points. It would probably be counterproductive and bring inflation back.”
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