Deutsche Bank Wealth Management CIO for the Americas Deepak Puri joins Yahoo Finance Live to discuss Netflix earnings, global market trends, volatility, inflation, and Fed policy.

Video Transcript

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- Welcome back to Yahoo Finance Live. Stubbornly high inflation means it's all about pricing power making winners out of companies able to raise prices without losing demand. Let's turn to Deepak Puri, Deutsche Bank Wealth Management CIO for the Americas for more on the setup. Deepak, good to see you here this morning. Inflation top of mind, P&G out with earnings. They showed a really big bump up in inflation. What companies should one be owning in this type of environment? Clearly, we have not seen peak inflation.

DEEPAK PURI: Good morning, Brian. So a great question. I think you could probably put those companies in three buckets, the ones that at least we like and this kind of macro environment. The first one would be the defensive ones primarily on the health care and consumer staple side. The other one would be the more cyclical sectors or the subsectors, so those would be things like chemicals or services, automotive industry.

And then lastly, I wouldn't really shun out the quality growth piece. These tend to be really the more structural names and that tend to be in the technology and consumer discretionary space. So I would say, first of all, not to shun equities at this moment given the peak inflation and the peak recession talk that we have been having in the market. But more importantly, make sure what you're invested in, and then trying to hedge why some of these investments were higher inflationary regime that seems like it's here to stay.

- So I am curious then, Deepak, to truly hear about whether you agree with the premise that we are at peak inflation here and whether or not we are. Are going to continue to have a broad swath of companies that will continue to have pricing power even extended into the remainder of the year and into next year?

DEEPAK PURI: Yeah, I think the narrative seems to be that the March, April numbers that we're going to see, especially on the CPI and PPI side might be the high watermark. It remains to be seen, Julie, how sustainable it is. There was some green shoots in the last CPI number. It was the slowest month of a month over the last five months increase that we saw. Some of the physical goods item like used car sales, used car prices went down, actually less. So there some positives there.

Having said that, it remains to be seen what would be the impact of growing agricultural prices going to have. This is really coming from the Russia--Ukraine crisis, which is going to have an impact on agricultural commodities, which in turn would keep the nominal number a pretty high. For me, the core PCE number, which is really what the Fed looks at is more important. Here, you're starting to see a little bit of moderation.

You saw the health care services component of the core PCE come down slightly more. So I expect that number to be a little bit slightly above 5%, still way above the Fed's comfort zone. But it's starting in the right direction, starting to moderate a bit

- Deepak, does the ugly quarter from Netflix give you pause about putting fresh capital to work in big cap tech?

DEEPAK PURI: Well, it does, and it doesn't. It really depends on two or three things. One is the time that you have in the markets, your temperament, and then your tolerance for volatility. I do believe, Brian, that we are entering a time frame where you are going to see these very strong forces at play, especially for risky assets. You're seeing higher cost of capital, tighter financial conditions, higher inflation, which means the Fed is going to be really aggressive to get to first to the neutral and then maybe over become restrictive in its policy.

That usually means that the PE multiple is going to contract a bit. So the big question is whether the earnings can really sustain this kind of a macro backdrop of slower growth and higher Fed policy. It seems certain companies can. Historically, that's been the case. What's different this time is really the trifecta, which is higher cost of capital, a quantitative tightening, plus lack of really a big fiscal stimulus.

Now, this has happened before 2017, 2018. We had pretty much the similar backdrop. But that time we had the Trump tax cuts to really help cushion some of the burden of higher cost of capital. This time around, I'm not really seeing much fiscal spending coming our way. So it could be one of those times where the market might be a little bit more volatile than what participants expect and hence a little bit longer time frame in the market is really warranted for you to get better comfort level.

- Deepak, finally, I'm curious you being in the wealth management business what you're hearing from your clients right now. Because the tone is definitely cautious at best, it seems, from a lot of investors who we speak to. You've got of course, war continuing to happen in Europe. You've got inflation spiking. So how are they feeling right now put simply?

DEEPAK PURI: Well, it depends, Julie. It's a very good question. A lot of the clients a little bit hesitant to put new money to work. But I think the focus has really been on the fixed income side. We haven't talked much about it. But the equity investors, they tend to understand equity markets go up and down. And you need to have the stomach for volatility. The fixed income investors have had this dramatic capital destruction since August of 2020 where you look at fixed income indices, they're down 8% to 10% for most investment grade indices.

That is something the fixed income investors are not used to. So really the big questions and concerns that I'm getting is that is this the inflection point for fixed income, whether we need to make dramatic changes to their fixed income part of their multi-asset portfolio. And I think that's something we've been advocating for quite some time. Really, the big concern is on the plain vanilla bond portfolio that has somewhat of an intermediate or long duration.

So you have a lot more investment rate risk, interest rate risk that you probably want to have in your portfolios. And hence you start to look at real assets be it commodities, infrastructure, space alternatives to hedge and move away from some of these pure fixed income plays.

- Yeah, definitely something to keep in mind as we see yields continue to go higher. Deepak, thank you so much. Great to have you with us. Deepak Puri is Deutsche Bank Wealth Management CIO for the Americas. Appreciate it.