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'The gap between the economic reality and asset prices is the widest I've ever seen': Thornburg's Bimal Shah

Bimal Shah, Portfolio Manager & Managing Director at Thornburg Investment Management, joined The Final Round to discuss the disconnect between the economic and stocks and gives his outlook for markets.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round here on Yahoo Finance. Myles Udland with you in New York. Let's turn our attention now to everything going on in the markets.

And we're joined now by Bimal Shah, Portfolio Manager and Managing Director at Thornburg Investment Management. So Bimal, let's just start with what you make of-- what have you seen in the last couple of days? We've really seen some cyclicals lead the way for the first time in a little bit. And we've had that trade really peter out since that really did so much to the work back in May and very early June? What do you make of the setup here? And are you surprised that reopening trades are picking up steam even with all of these concerns about where fiscal stimulus goes from here?

BIMAL SHAH: Right, yes, so if you think about where the market is right now, I think the gap between the economic reality and asset prices is the widest I've ever seen in my investing career. If you think about the unemployment rate, currently we're at a 10%, And it would take us years to get to a three handle, which was where we were pre pandemic.

And yet, the market is trading close to all time highs. So what we would need going forward is continued doses of fiscal stimulus. And if fiscal stimulus falters because of political gridlock, the Fed would have to step in and provide monetary stimulus. The only problem to this path of recovery is that it is prone to policy errors. And I think that's what creates market volatility in the near term.

MYLES UDLAND: So with this gap, I guess, in place right now, what have you done in this environment? What do you feel compelled to do? What are your core assumptions then about how things play out over the next six or 12 months?

BIMAL SHAH: I think what you do is you hold on to the businesses that we really like. So at Thornburg Investment Management, what we're doing is we're buying both value as well as growth. So on the growth side, we continue to like some of the secular growth stories, think of Facebook, Google, Thermo Fisher. Those are companies with strong balance sheet, strong corporate competitive positioning, as well as pretty good secular tailwinds, which would last for a long period of time.

So that's growth. I know the market is not in favor of value stocks. But there are really good value stocks that are out there, which I would definitely recommend to certain investors.

So if you've been involved in assured guarantee, which is-- which is a municipal bond insurer, the market has been worried about what happens to the municipal bond market in terms of losses. When you actually do the analysis, we think it's pretty manageable. On top of that, if you look at the new issues that are getting insured in the municipal bond market, they're double versus what they were a year ago because of the pandemic.

So again, trading at a pretty hefty discountable value, we would definitely recommend that. And then on the short side, there are a lot of speculative growth, companies which probably would never be profitable. But because of the low rates and negative real yields, these assets are getting bid up. So I would recommend those kind of trades to investors.

MYLES UDLAND: And thinking finally just about the macro backdrop here, you mentioned inflation is something that could materialize, could potentially be a positive for valued stocks. I mean, as you see, the lay of the land, does inflation seem like a story investors are not paying enough attention to as a potential, just cause it's been absent from the environment for two decades now as a potential development as we get into 2021?

BIMAL SHAH: So in the near-term, I don't see any signs that inflation is picking up. But it's very hard to say. If you look at real yields, the real yield on a 10 year treasury bond is negative 1%, right? Well, what that means is that if I lend the US government $100 today, over the next 10 years, they would repay me $90 in real terms.

So that is crazy dynamics, right? And that's what's pushing a lot of investors into some of these growth stocks, especially speculative growth stocks. You know, you were talking about Eastman Kodak, right? That's just an example of how investors are behaving.

So I-- it's really hard for me to predict, not being a macro investor when inflation would pick up. But when it picks up, you would see a lot of those buyers line up to buy high quality value stocks.

BIMAL SHAH: All right, Bimal Shah, Portfolio Manager Managing Director at Thornburg Investment Management. Always great to get your thoughts. Thanks so much for joining the program.

BIMAL SHAH: Thank you.