NFJ Investment Group CIO John Mowrey joined Yahoo Finance Live to share his 2022 market outlook and opportunities for value investors, including the ‘valuation discount’ for emerging markets not seen since the 2000s. Recorded December 27, 2021.

Video Transcript

ZACK GUZMAN: I want to turn to the markets here though as we are seeing an overall surge when you look at all 11 sectors right now in the S&P 500 in the green. Perhaps a record end to the year on the horizon. Of course, just a few trading days left in 2021 but where do we go from here?

For more on that, I want to bring on John Mowrey, NFJ Investment Group CIO joins us here. And John, appreciate you taking the time to chat with us. I mean, when you're looking out into next year, I assume you know, some of those themes are going to be carryovers from 2021 but what do you like and what should investors be watching?

JOHN MOWREY: Zack, great to see you. And as we finish out the year as you stated, it's been a spectacular year for equities. We very much believe that valuations should shape investor expectations as we look into the new year. One of the things that is on our mind is the rate of inflation, it has been elevated, it's the highest that we've seen since the '70s.

And one interesting statistic I'll share, from 1970 to 1989, the annualized inflation rate was around 6.2% over that time period. So pretty meaningful inflation but the dividend growth rate of the S&P 500 exceeded that at 6.5% annualized over that same time period. So I think dividends, and particularly dividend growth rates are something interesting that investors should be paying attention to and there's a lot of dividend growth rates that are favorable as you look across industries and sectors. And particularly, with corporate profit margins where they are, I think that provides an interesting way for investors to access equities and hedge against an inflationary environment should it persist in the new year.

ZACK GUZMAN: What are some of those dividend names you like? Because sometimes you might see some flashy yield there but it comes at the expense of being just a terrible stock to own. So talk to me about both of those things if there are any names that you have on the top of your list.

JOHN MOWREY: Great question. I'll start first with yield, people talk about value traps all the time, and I'm a value guy, so value is something that we're always considering and looking at. And when I think about value, you have to be aware of a yield trap to your point. I mean AT&T has got a huge dividend yield but it has over time been a tougher place to compound capital.

When we look at companies that have interesting dividend yields and interesting dividend growth rates, one area I would point to is the semiconductor space. If you look at the semiconductor space, you have ample cash on hand, very clean balance sheets, very healthy dividend growth, whether it's Broadcom, Texas Instruments, or even a Teradyne. So there's multiple areas there.

I would also pivot and look at some of the specialty REITs. Some of the towers, in particular, Crown Castle and American Tower also have very interesting dividend growth rates. So we like those but we think investors need to be very cautious to your point on dividends. You can't just say, hey, this is an interesting dividend yield and not pay close attention to the underlying fundamentals.

ZACK GUZMAN: And lastly, I was just-- I was looking at your notes and one thing stood out to me when you look at maybe some home bias in looking at US equities versus the rest of the globe. And you're pointing out a widening gap there. Talk to me about maybe the opportunity that some might be overlooking in emerging markets.

JOHN MOWREY: So emerging markets have been down and out. I think some of the worst-performing areas would be gold, emerging markets, anything tied to how the dollar has strengthened. So a couple of points there, there have only been three periods where we've seen the dislocation in emerging market equities to this degree prior to this year. Those periods would be 2008, 2001, and 1998. And so you're getting emerging market equities at valuations we have not seen since the late '90s.

And I'll share you know, kind of an interesting statistic, in my opinion, if you bought the emerging market index in October of '98, you are still beating the S&P by 100 basis points a year up until today, which is pretty amazing given that you've had Google, FAANG, you know, all these amazing American companies that have done incredible over the last decade. And if you bought the emerging markets in '98 during the peak of the tech bubble or near the peak of the tech bubble, you're still beating the S&P. So we think that there is value there and particularly when we look at the underlying fundamentals and the shifting composition within the emerging market equities and that dislocation in valuation it gets us excited. So we think that there are pockets there.

There are risks, of course. So we would advise investors to approach the emerging markets in a very diversified manner. We don't like country-- big country bets or trying to take those big sector bets in the emerging markets. But if you have a diversified portfolio of companies that are of a high-quality nature with stable earnings, growing dividends, we think that emerging markets are an interesting way for investors to hedge some of the gains they've had in the U.S. but also, quite frankly, capture the valuation discount that we've not seen since the 2000s.

ZACK GUZMAN: Yeah. Always interesting and thank you for putting it in historical context as well. Helpful for investors to understand kind of what's going on there. John Mowrey, NFJ Investment Group CIO. Appreciate you taking the time to chat with us again, man. Be well.

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