Keith Parker is the head of US equity strategy at UBS. In this interview with Business Insider's Sara Silverstein, Parker explains why he's not worried about a trade war. Following is a transcript of the video.
Sara Silverstein: So China tariffs were announced, how scary is that?
Keith Parker: I think it's a little rattling for markets, what's been announced, $12.5 billion cost on the US side, spread across many many products, and a retaliation on China in the same day of the same amount. I think the fact that it's done in the same day means there's one less bomb to potentially drop in terms of headlines further down the road. And on the US side, those tariffs were not placed on consumer goods, which would have a more material impact and from a market perspective, we do see quite a lot priced in, in terms of our downside scenario, as it relates to trade.
Silverstein: And what names or sectors or companies are going to be most hit by the recent announcement?
Parker: On the China side, you saw aircraft, some autos, and food products, soybeans. On the US side we think there's some importers of those types of goods, but also domestic producers of some of those imported goods from China could actually benefit. I think over the short term there could be a risk for those stocks in the US that have revenue exposure to China. We've seen those stocks underperform for the last two weeks.
Silverstein: And you're the biggest bull on Wall Street, or you were, that's what all the headlines say. Are you still?
Parker: Yes, we are very bullish. If you look at the fundamentals from an economic perspective, growth has been solid, we expect March data to be strong and show inflation contained. And importantly, earnings for the S&P 500 are showing strength in the first quarter. Early reports have beaten estimates thus far by over 10%. That's the highest since post crisis, and you put on top of that a multiple that's below 16, levels we were at post Brexit, we see near term upside ahead.
Silverstein: So you're not worried about valuations at the current levels?
Parker: I think in January, you had a pretty good argument that things were a little bit stretched and starting to price in, not just tax but a better growth outlook. Below 16x, this is where we were pre-election, and we have actually a tax plan passed, a $280 billion boost, and trade costs of $12.5 billion times two is quite a bit smaller, and so we're less worried about that on the downside.
Silverstein: And you're bullish on the market, but how do you feel about tech?
Parker: So on the tech side, medium term it's one of our top picks, we've been long since November throughout the course of the year, and our view was post the VIX shock that we saw in early February, what leads is that growth and momentum. The tech out performance was well in excess of what we thought, and about six weeks after that vol spike, you typically see a momentum unwind and so tech, in the crosshairs of both regulatory and trade concerns, have underperformed and given back about half of the relative gains. And so we're positive medium term, but we would prefer other cyclicals like industrials over the shorter term.
Silverstein: So you like industrials, what else do you like for 2018 for US equities?
Parker: So we've liked industrials on the capital spending and corporate spending theme, we think that's underpriced going into earnings. We also think banks are more attractive, they've underperformed, even the move in rates. Rates reset higher, valuations on banks reset quite a bit lower. And then on the defensive side we do like the healthcare sector, that's our preferred defensive growth pick.
Silverstein: And what's the worst-case scenario for stocks?
Parker: I think the worst-case scenario for stocks is we've have a litany of concerns, whether it's rising rates that gave way to tech and regulatory and trade concerns. But at the core we've had a backdrop of solid growth and inflation is contained, and I think the risk for stocks is if that narrative does shift towards one where it's slowing growth and rising inflation. We'll get a good first read of that, potentially, on Friday with payrolls, average hourly earnings, which we expect a good report from payrolls.