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00:00How much will earnings have to overcompensate to be able to make up for these conditions. Well first of all thanks for having me today. I think you asked a really provocative question. Absolutely real yields are tied to stock market valuations. Now you could look at stocks as being relatively long duration assets. And the more growth oriented the equity is the more tied to interest rates the valuation is going to be. So I think you're bringing up the right dichotomy right there when real yields go higher. That's going to pressure equity market valuations. And in fact you've seen the forward P on the S & P 500 has gone from about twenty two and a half where it started the year to now something under 18. That's a lot of multiple contraction given the fact that earnings have held up. So our view is that that if earnings can continue to be relatively strong throughout twenty two which is our base case scenario that even if the multiple contracts a little bit more from here. Let's call it 16 17 times you may have seen the worst of the equity pullback. Now the big you know the sixty thousand dollar question here is do we get a recession concomitant with this pullback. Right. Because equity bear markets that aren't bookended by a recession tend to be a lot shallower and the duration tends to be a lot less long. So that is indeed the pertinent question here is are we going to see a recession in the next six to nine months. Have investors adequately really priced in the pace and the impact of quantitative tightening at. We've certainly gone a fair amount of the way towards there in very very rapid pace right. You look at just the market of the last three days since the Fed since the Fed announcement after a bit of euphoria. It's been absolutely nothing but red since. And so I think the market is rapidly repricing the idea that yes the Federal Reserve balance sheet is going to be contracting is going to be tightening. But remember too it's going to take about four years at the current pace of liquidity draining for all of the liquidity that was created over the last few years of quantitative easing to actually take to go away. So the Fed balance sheet will be getting reduced but but not by a dramatic amount in the near term. The interest rate question I think is the bigger one because markets just don't like the magnitude the change in the rate of change that we've seen in interest rates. And of course they're extrapolating now worst case scenario of course here in the US. Chris we continue to talk about the potential of a recession as you talked about. But in other parts of the global economy like some parts of Asia where travel is resuming. We are expecting growth to really accelerate. Are there any overseas markets that would be more insulated from all of these macro uncertainties. You know honestly I would place Asia particularly North Asia as one of the areas that I think is most susceptible to seeing a recession in the near term. If you look at some of the soft data in China for instance the PMI readings that we've seen recently these are well into contractionary territory which concerns me. And of course as Asia goes excuse me as China goes the rest of Asia tends to go economically. Japan has had a relatively moribund economy as well. And those are the two largest economies in Asia. Now in terms of pockets of overseas that might be somewhat insulated from this. I think about some of the commodity levered areas. You know Australia Canada Norway. These are countries that whose economic fortunes tend to wax and wane with the price of commodities. Those might be on a relative basis more I think a little bit more insulated than than North Asia. Is that also a sector that you like. Commodities. Well yes in our longer dated. Yes absolutely. Yeah. So we we'd like energy securities across the board and in our longer dated most risk tolerant portfolios. We do have some international exposure in areas like Canada and Norway specifically as well as certain areas of Latin America which of course is also tied into that commodity. Positive correlations to commodity prices.

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RiverFront's Konstantinos on Macro Outlook

Chris Konstantinos, Director of Investments and Chief Investment Strategist at RiverFront Investment Group, discusses his outlook for markets and the economy. He speaks with Shery Ahn and Haidi Stroud-Watts on 'Bloomberg Daybreak: Asia'. (Source: Bloomberg)

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