Top-rated financial advisor Andy Chase on the best investment for 2017

Published Thu, Jan 26 20172:47 PM ESTUpdated Thu, Jan 26 20173:04 PM EST

Stocks remain the best place to invest in 2017 and beyond, as compelling valuations show the market has further room to run, according to Morgan Stanley Private Wealth Management's Andy Chase, who oversees more than $20 billion in assets for investors. "If you don't have the guts to be entirely in real estate, which I think is more in the eighth or ninth inning, I think stocks are still in the third or fourth inning, which nobody is talking about because I think multiples should be much, much higher," Chase told CNBC PRO. "I look at stocks as the only asset class, frankly, that hasn't had price inflation. It's actually extremely cheap relative to bonds," Chase added. He was selected by Barron's in 2016 as the top financial advisor in the United States, after a 30-year career in wealth management. In this exclusive strategy session hosted by CNBC's Mike Santoli , Chase reveals his approach to investing and also discusses: Where to find value in the stock market. How to make sense of the investment landscape under Trump. His favorite portfolio allocations for the months ahead. Active vs. passive investing. Whether 'robo-advisors' work. PRO subscribers can also read the entire transcript of the exclusive interview below. (Editor's note: The content below is from a third-party service and there may be some minor transcription errors. Watch the video for the exact quotes.) MIKE SANTOLI: Andy Chase is managing director and private wealth manager at Morgan Stanley. Prior to joining Morgan Stanley he ran the largest wealth management practice at Citigroup, Smith Barney division. And he also served as the president of SSB Ventures, where he oversaw venture investing for Citigroup. Named one of Barron's top financial advisors in the nation, he's a graduate of Stanford University and he joins us here at the NASDAQ to talk about his investment outlook for 2017. Andy, thanks a lot for bein' here. ANDY CHASE: Thank you. MIKE SANTOLI: So here we sit, in the last few months, at least if you were just lookin' at the headlines it seems like much has changed in the world and the markets, right? Presumably your clients had a plan going into the election in asset allocation, certain assumptions about how things would go. And then you saw this quick reaction in interest rates, and to some degree the stock market on supposedly greater growth expectations, everyone's saying interest rates have to go higher right now, maybe inflation's brewing. And somehow it has changed the calculus for some investors. From your perspective, has much changed? What do you think is people have gotten right, or perhaps wrong about that outlook? ANDY CHASE: I think it's entirely possible that growth expectations in the U.S. will uptick a little bit. I find it a little bit comical that regardless of who won an election, that one elected official is gonna change the global growth, given the headwinds of globalization. Whether Hillary had won or Trump won, to have interest rates up a full point in the face of all other global interest rates dropping at 0% to 1% I find a little bit misguided in the fact that he's somehow gonna lead this charge to increased globalization of increased growth, I should say. I just don't see that really happening. At the margin he might make it a half a point better growth. And the real interesting one with me to watch it would be Yellen, who will be I think stepping on the breaks a little bit. I think that's gonna be a fun one to watch. MIKE SANTOLI: So let's talk about the interest rate outlook then. You say a full point increased interest rate. So if you're looking at the ten-year treasury note, roughly speaking 1.5% up to 2.5%-- or thereabouts. And of course, a lotta people sorta saying, "Look, the great bull market in bonds, it's lasted 35 years, might be over. And it's up, up and away for rates and the Fed's gonna have to maybe catch up and do three interest rate increases this year," something like that. What's your take on that view? ANDY CHASE: First of all I disagree that they're gonna raise them three times; they just did. I heard rates were goin' up back to Bernanke, I heard rates were gonna go up when the Fed was tapering. A year ago, December '15 they raised rates, and sure enough the five and the ten-year went lower, which is what I generally watch, is the five or the ten-year treasury as opposed to the one-day money. And I just have a hard time thinking the U.S. can continue to raise rates when Sweden, Switzerland are zero or negative rates (which I honestly don't understand). You got Germany at 30 basis points, Japan at ten years is under ten basis points. It's hard to understand how we're gonna go two and a half, three, three and a half, four, which means mortgages are at six, if that was the case, a two-point spread. I just don't see us doing that. And telling voters, "Yeah, it's time to slow things down again.". MIKE SANTOLI: And you don't think the markets will take bonds there, just because of what else is going on in the world? ANDY CHASE: No, no. My basic economic take is the world's gonna be a very long, extended kinda funk, and not enough to make any CEO or politicians happy. Not negative, no recession, which people had us in a recession a year and a half ago. And it's just gonna keep limping along, and maybe at the margin the U.S. will get a little bit better. But the rates go up, the dollar's stronger, and that sucks growth out. It's too many headwinds. I guess that's my take MIKE SANTOLI: Seems like there there's limiting factors those moves, right? ANDY CHASE: Yes. Yeah. MIKE SANTOLI: What does that mean for other asset classes, for stocks? right now, at least in the last few months, stocks have really only made some headway when rates were going up, when people thought that this whole cyclical change was underway. How do you decide to value stocks when it comes to relative to interest rates? ANDY CHASE: I think stocks are cheap. And I'm always flabbergasted at how had my presumption of interest rates. But I think they're gonna stay down for a lot longer when people think. And whether they're at-- the ten-year's at two, or two and a half, or even three I don't think it's going to four. And to be at two points, we're already a point higher than Spain and Italy. It doesn't really compute to me. So if you assume rates are staying down and you look at the valuations of-- I don't like saying "stocks;" "businesses" always sounds better to me when I say "businesses" and you're earning a buck on roughly a $17 investment or a 6% to 6.5% earnings. MIKE SANTOLI: With the $17 times multiple ANDY CHASE: You're earning 6.5% by owning a business, and door number two is 2% or 2.5% for a bond, which by definition doesn't grow. And I think generally the U.S. is growin' a little bit. And it's not as bad off as people think it is. We're generally growing at normal rates right now globally. And so I look at stocks as the only asset class, frankly, that hasn't had price inflation. It's actually extremely cheap relative to bonds. And people keep sayin', "Well, rates are gonna go back up." If you don't believe that, equities are goin' a lot higher. MIKE SANTOLI: So equities have lagged in terms of the repricing of other asset classes, you think--? ANDY CHASE: Oh yeah, no question about it-- MIKE SANTOLI: Why would you think that is? Is it just kind of this muscle memory of investors not wanting to pay up for stocks? ANDY CHASE: I don't know. The mathematical side, no question it's lagged because you've had multiple expansion everywhere. CAP rates are half of their 20-year multiple, and here's the stock market right at its 20 and 30-year average multiple. But the 20 and 30-year average, ten-year treasury was up at 6%, 6.5% and that math made sense. Then you hit the psychological side of the market. People love to hate Wall Street and they always see risk. I had people in worried about selling all Johnson and J-- stocks and things like this. And I'm like, "You're gonna sell your place in New York or in London? Oh no, that's fine." But somehow companies, they keep seeing risk and have this trading mentality. And I don't understand why other asset classes are considered, "Oh, they're generally safe," like real estate. You know-- MIKE SANTOLI: So do you feel like you have to spend a lot of your time making that case to clients? In other words, their orientation-- ANDY CHASE: Yes MIKE SANTOLI: is to say, "Lemme just take a little bit less risk," or at less perceived risk? ANDY CHASE: Well, going back to the election comment, there was a third of the people that would not invest 'cause Hillary was gonna win, there was a third of the people who weren't gonna invest 'cause Trump was going-- there was a third of people who were on the sidelines 'cause they just wanted to wait and see. And I think what happened on the end of it is at the margin a little bit of money came outta bonds, and a little bit of money came off the sidelines and went into equity markets when we had this little short-term pop. And my sense is, going back to what I said earlier, people love to hate Wall Street. And for people to make 10% all you need is 5% earnings growth, and if the multiple goes to 17 to 18 next year, then 18 to 18, then 19 to 20. Every one of those moves is another 6%. And I would argue with interest rates down here in the 2's% rate. Multiples should be in 25 times earnings. MIKE SANTOLI: And 2% dividend. ANDY CHASE: Yeah. It's uncanny how cheap things are. You've never had the S & P's dividend yield be in excess of a five and ten-year average kind of a thing; that's never happened in history. Just the dividend income? Yeah. It's cheap. MIKE SANTOLI: And where within the market do you think that things look relatively better or worse? ANDY CHASE: I'm a little cynical of people betting on making their investment decisions based on where the government's gonna spend money. For example, oil, infrastructure, defense: I think that's a mistake, and there was a little bit of a run there. And I saw this morning that he was getting involved in the pipeline stuff. And I can't really understand when you sign these infrastructure bills or pipeline bills you still gotta deal with environmentalists, and lawyers, and the federal government's gotta match a state budget and bidding. These things take so long to evolve. I think that's a mistake. The stuff that I think there's opportunities are the things that are cheap. Even banks have had a run there's still 12, 13 times earnings, the financials are cheap. They clearly will be making a little bit more money with the Fed raising rates, which I think next year they'll probably do. This year we'll do one more raise; not three. Probably one more. They'll wait and see how things go down and see if some of his policies turn into be inflationary. And I think health care's extremely cheap. Boy, did that get beaten up in the political process, and to the point where it's now a 20% or 30% cheaper multiple for pharmaceuticals the electric utilities, which were already regulated. Utilities can't grow but 1% at the most, and they don't have the headwinds of aging and demographics and things like that, so that's cheap. And technology's pretty cheap too. Technology is cheap right now, relative to its statistical averages. And those are the three areas that I think are gonna be growing. So that's where I put my money now MIKE SANTOLI: It's interesting when you point to health care and pharmaceuticals in particular 'cause in some ways (and I've seen this comparison made) it looks like the way energy did a year ago, in the sense of everyone said, "Well yeah, sure, they're beaten up a lot and they sure look cheap on paper. But they're never gonna have pricing power again or the value of the commodity's goin' down, or nobody likes it. It's a glut that's gonna last forever." And then things got just a little better and the stocks led the market last year. I mean, I'm not saying it's gotta work that way, but it's just interesting-- ANDY CHASE: I have to laugh on this one. It's the drugs that keep health care costs down. People have that wrong. Take the penicillin and get better. Anything you can do to stay out of a hospital is a plus for the system. Drugs are only 10% of the health care spending in the United States. And so I'd much rather take whatever drug it is and get better, and if they raise the price a little bit it's nothing compared to having to spend an extra day, or two, or three in the hospital and I like to buy things cheap. And when things have been beaten up now, like the health care area has or financials were on legislation. And one comment I would say on the legislation or with Trump: I think it's much easier to take away legislation like the extra banking rules that were layered on 2009, or the innuendo of legislation, which is what's been depressing the pharmaceuticals, than it is to actually get Congress to agree on how to spend money or any-- the Senate's only 48/52. I find it unbelievable that people think he's got a great mandate. 'Cause I don't think the Democrats him and I'm not sure McCain or Ryan get along well. I mean, I think he's got a pretty tough sell to start spending money wildly on things MIKE SANTOLI: So some of these deregulatory moves seems like a quicker path? ANDY CHASE: I think it's a much easier thing than get everybody to agree to how to spend money at the government level as opposed to benefits, education, kids. They'll always pull on your heartstrings and those kinda things. There's a lot of Republicans that wanna lower tax brackets, but they definitely also wanna balance budget. It's gonna be interesting to watch. MIKE SANTOLI: And just with regard to technology, it certainly does look cheaper than a couple decade average. But it's interesting how the earnings are really clustered in these sorta mega cap, world beater companies. Is that a concern? Or do they have such a dominant position that there's plenty of growth for them? ANDY CHASE: It's a concern. The one thing I think people are underestimating is I'm not sure he'll get incomes taxes down for individuals. I do think he will get corporate taxes down somehow and keep the jobs here. You can't have corporate headquarters movin' to Singapore and Amsterdam. The other one that people are really underestimating is if he's able to repatriate this cash, and how important that is. 'Cause the growth rates have slowed down, a lotta these companies have matured. But they've got obscene amounts of cash offshore, same thing with the pharma companies have a lotta cash offshore. MIKE SANTOLI: I've been wondering about the implications of that. If you are a CFO of one of these huge tech companies, of course the cash is also very concentrated in the Alphabets, the Apples, Microsoft, et cetera. They didn't lack for cheap money, right? Apple's gone out and borrowed $70 billion against the $200 billion it has overseas. What changes if they're able to actually just bring that cash back over here and have ready access to it? ANDY CHASE: They can always do the standard buy a stock back and do the dividends. But on the growth comment, the bigger companies have slowed down, a few exceptions. But generally the bigger, mature companies have slowed down. And I think they'll use that cash to make some acquisitions, and the same thing on the pharma side, whether you're, these guys have lot of cash. And the targets of the companies that they would use the cash to buy are generally U.S.-based companies. They're not as many tech or pharma companies, emerging growth MIKE SANTOLI: Yeah, emerging growth companies, yeah ANDY CHASE: in and Israel and things as there are here. And so my sense is you're gonna have the M & A activity go up enormously. Whether they're strategic and they get it done, we'll see how good the CEOs are. But I think they'll use that cash to try to reinvigorate the growth rates. MIKE SANTOLI: You're located in Silicon Valley, been close to the venture business. What does that market feel like to you at this point? There's a cliché idea that there was this peak a couple years ago in terms of the level of activity, not a lot of IPOs. Where does that sit? ANDY CHASE: Venture business is still very tricky. I didn't like the unicorn stuff, and the valuations were high. And you had the big mutual fund companies and the hedge fund companies dropping down, and it was not traditional venture guys financing those companies, those valuations. That was pretty clear. And they're still a little bit expensive. And the venture guys would sure like to get some of these companies out. And I think the threat of the cash coming back, and the repatriation will rejuvenate some of the IPO market, is my gut. I think IPOs will pick up again in 2017. It didn't have many the last couple of years, but the companies are growing; they're all growing. And once again, with interest rates down and earning nothing on your cash, that looks fairly compelling to buy some of these growth stories. MIKE SANTOLI: Just to turn to your business, the wealth management business, a standard line out there is that it's yet another one of these industries that's kinda being destabilized by certain things, whether it's just low-cost passive investing, everyone seems to think that's the solution. And I guess an extension of that would be these automated asset-allocation services, robo-advisors, as they call 'em. Are those gonna be these big, continuing waves that kind of get more and more younger customers? ANDY CHASE: They certainly have some momentum and I think they'll probably continue to get lot of customers. I think they'll be wrong, honestly. And everything goes in cycles MIKE SANTOLI: They'll be wrong because of how they invest or because of? ANDY CHASE: Yeah, the asset allocation models, I'm very cynical of these things. And the textbook approach, and where you've gotta 60% in equity and 40% in debt. And if they wrote that book ten years ago, it's been based on data from 30 to 11 years ago, right before they wrote the book, and I think we're looking at a very different world. I certainly don't think that you wanna have 40% of your money in bonds at a ten-year at 2.5%, and I don't think rates are going up. Don't get me wrong, I don't think bonds are gonna get hit. MIKE SANTOLI: So it's not because they're gonna lose a ton of money? ANDY CHASE: It's just the 2.5% doesn't float my boat. And you start with that allocation, and the notion that you're gonna have large-cap, small-cap, Europe, Japan, emerging markets, gold, commodity, these allocations across-- and still like ETFs in a sector but I strongly disagree that you wanna spread money around the rest of the world like that, or into inflationary assets as if the world's reinflating. That's not where my principal worry is here. I'm much more worried about growth than I am about inflation. Although I've been hearing it forever that, "Oh, we're gonna reinflate, and rates have to go back up to normal rates," whatever that means. I just don't see it happening. MIKE SANTOLI: Sure. Yeah, just because it's what you remember as being normal doesn't mean that has any gravitational pull at those levels ANDY CHASE: No, that's not gonna happen. MIKE SANTOLI: Although you're starting to hear people say, "Well, of course you're not getting any real return outta bonds. But the purpose they serve in a portfolio is just to kinda stabilize things." ANDY CHASE: Yeah, and I don't dislike them 'cause I view 'em as cash on steroids. If you don't have the guts to be entirely in real estate which I think is more in the eighth or ninth inning. I think stocks are still in the third or fourth inning, which nobody is talking about 'cause I think multiples should be much, much higher. And I have laugh, in 2000 when the market cracked we were at 30 times earnings, nearing $3.3 on $100, if you will. And door number two, treasuries were at 6.5%. Today the fractions are reversed. I mean, the stock market is actually cheaper relative to bonds than it was expensive back then. So we could get a lot of price inflation here, which has not occurred. And I always laugh that people think interest rates going down helps the poor guy with credit card debt and mortgage debt. What it really does is it inflates asset prices. And it's happened in art, cars, buildings; it just hasn't happened in businesses yet. And I think it's gonna MIKE SANTOLI: Or not as much, right? You were at-- ANDY CHASE: Not as much. I think it's gonna come-- MIKE SANTOLI: 14 times five years ago, so ANDY CHASE: Yeah, it's come up a little bit. Seventeen times is kind of a normal multiple MIKE SANTOLI: Forward, yeah. ANDY CHASE: And it feels like we're growing at normal rates. It just feels like everything's over-worried about these days. I have to laugh, in that my grandfather built a bomb shelter in the '60s at his house, in the '70s we were impeaching presidents, and somehow things are so much risker and worse today. Feels about normal to me. You get pounded with social media. So I think it's getting into the stock market guy's head more than it is the real estate investor's head. MIKE SANTOLI: One thing we do like to ask, maybe it feeds into that, before we finish up, is any lessons over the years you've been in this business? Either lessons that you have to keep conveying to clients or things that you've learned as a pretty good principle to always adhere to? ANDY CHASE: Yeah. I was thinkin' about that the other day and I will get the quote wrong, but Warren Buffet was saying somethin' to the effect that, "The stock market is like having somebody at your property line chirp at you every 20 minutes to sell your property, sell your property, sell your property." And of course no one listens to that. And one of, I've always viewed, my principal jobs is to walk people off the ledge. First you wanna make sure they've got enough cash or bonds to weather the storm, whatever their version of a storm is ('cause risk is subjective). But outside of that is to make sure that they don't panic at the wrong time and get out at the wrong time. And similarly, when things get expensive to keep skimming a little bit back and re-positioning back, which it doesn't feel like we've had this great run. It doesn't feel like we had. I mean, the bonds have had a great run, real estate has had a great MIKE SANTOLI: Oh yeah, the stocks sorta sat still for a year and a half, right? ANDY CHASE: They sat still for a year and a half. And I've seen very serious price inflation, and other areas in business they're doing kind of okay. MIKE SANTOLI: For CNBC Pro Talks, I'm Mike Santoli. Transcript by Transcript Associates, Inc.

"If you don't have the guts to be entirely in real estate, which I think is more in the eighth or ninth inning, I think stocks are still in the third or fourth inning, which nobody is talking about because I think multiples should be much, much higher," Chase told CNBC PRO.

"I look at stocks as the only asset class, frankly, that hasn't had price inflation. It's actually extremely cheap relative to bonds," Chase added.

He was selected by Barron's in 2016 as the top financial advisor in the United States, after a 30-year career in wealth management.

In this exclusive strategy session hosted by CNBC's Mike Santoli, Chase reveals his approach to investing and also discusses:

Where to find value in the stock market.
How to make sense of the investment landscape under Trump.
His favorite portfolio allocations for the months ahead.
Active vs. passive investing.
Whether 'robo-advisors' work.

PRO subscribers can also read the entire transcript of the exclusive interview below.