Market strategist: Investors are rotating ‘into old school economy names’

Edison Group Director of Research Neil Shah joins Yahoo Finance Live to discuss equity markets, investor sentiment, and the expectations for stocks next year.

Video transcript

[AUDIO LOGO]

BRIAN SOZZI: The era of cheap money is dead, meaning economic growth could be hard to come by next year. Let's talk more about what this will mean to the markets with Neil Shah, Edison Group director of research. Good to see you here.

Neil, look, we were just talking about, in the premarket here, we might be seeing a Santa Claus rally. Does that mean investors should back up the truck into year end?

NEIL SHAH: I mean, look, I mean, I think that since the mid-year, equities remain. Valuations are starting to look a little bit more attractive. And I think there is a willingness to start participating in equity markets.

The question is where. So you highlighted that consumer discretionary had been underperforming. And that, I think, is just a reflection of, you know, what we're seeing, which is that central banks are tightening. That pain is being taken on by the consumer.

There's lots of discussions about, this time, around the consumer is in a stronger position than, perhaps, the financial crisis. I think the major difference this time around versus last time around is that we're gonna see a very different central bank policy going forward. So that bailout that happened last time around, the asset price inflation that happened last time around, I don't think we're gonna see that.

And that means it's gonna be-- the brunt of this is gonna be borne by the consumer. Instead, we're seeing a rotation into old-school economy names. So I think you can see that reflected in the Dow and the NASDAQ. Dow is 6% of its all-time highs. The NASDAQ is down much further, something like 30%. And you're seeing this rotation out from growth into those companies that you're gonna have real assets, are generating cash flows--

BRIAN SOZZI: Right.

NEIL SHAH: The barriers to entry to putting in those real assets is what is attracting people. And so I think there is gonna be participation in the markets, just in different areas.

JARED BLIKRE: Well, and Neil, let me ask you to drill down into some of the sectors or styles that you're looking into the market. You noted that big outperformance by the Dow relative to the NASDAQ. Do you expect that to continue? And then drilling down into some of the-- drilling down a little bit into the indices, where do you see that outperformance to exist?

NEIL SHAH: I mean, when I talk to professional investors, there is this pivot that's taking place from growth into value. And how are they expressing that? So the expectation is that while you might see some moderation of inflation, it's gonna be persistent. There's gonna be some second-order effects next year as the cost-of-living increases start to come through in pay packets.

And so there is a feeling that inflation rates are gonna be sticky for a period of time. In most managers' minds, we're going through a long period of muted growth. And there's three things really driving that.

There is a rate environment. There's the fact that, you know, China is going [INAUDIBLE] growth. And you're seeing a certain amount of deglobalization happening at the same time.

So, you know, where are they then thinking about sort of participating? They're participating in some old-school economy names because you can invest in a company where you may not necessarily see capital gains growth over the course of the year, but because you're compounding those dividends, and the cash flowing, they're paying out those dividends, you are getting returns.

The other place where, actually, there is an interest is in the smaller companies, so, you know, this idea that it's much easier for a $100 million company to double its revenues than it is for a $2 billion revenue company to double its revenues. And so those companies that are nimble that are gonna-- likely to increase market share is also an area of interest.

The funding environment is gonna remain difficult. And I think the reason that there's an attraction to the companies that are listed is that they're probably in a position of strength compared to their private peers. So there's going to be some expectation that you see some consolidation in the market, that you see an improving sort of market position as a result of that, better pricing power coming through. And that's how investors are sort of positioning for alpha.

The other thing I'm sort of picking up is that in these old economy names, a lot of the alpha is also coming through investments by these companies to make themselves more carbon-neutral, you know, a better position from an EST perspective. So that is also on investors' radars.

So when you're drilling into the sectors, I mean, I think it's the capital goods companies, those B2B companies. But at the same time, occasionally, people are revisiting, you know, growth names, tech names, because you will find, given the selloff, something that's sold off to such an extent that it starts to look like a values play.

BRIAN SOZZI: Neil, I'm being tasked with writing a predictions piece on the markets for next year. I'm really coming up empty. I don't have anything good. Hit us with one big prediction for the markets next year. You have 30 seconds.

NEIL SHAH: I think markets will be up compared to this year next year. And old economy names are gonna outperform new economy names.

BRIAN SOZZI: Way to bring it. That's what I'm talking about. Edison Group Director of Research Neil Shah, thanks for coming on. I know it's a busy holiday week. We'll talk to you soon.

NEIL SHAH: Thank you very much.