Dan Niles predicts a recession — and picks stocks to weather the volatility ahead

Published Thu, Mar 17 20229:22 PM EDT

Satori Fund's Dan Niles said he sees multiple, "very strong indicators" pointing toward a recession next year and picked stocks he believes are better placed to weather the market volatility ahead. "We've got a big problem ahead of us, and the [U.S. Federal Reserve] for the first time arguably in over 13 years is your enemy if you're an investor, versus your friend," Niles, founder and senior portfolio manager at the firm, told CNBC's "Street Signs Asia" on Thursday. The Fed on Wednesday announced its first rate hike in more than three years and indicated an aggressive path ahead, with more hikes penciled in at each of the six remaining meetings this year. That comes at a time of soaring inflation in the U.S., with the February consumer price index rising to its highest level since Jan. 1982 . "The risk of recession next year is very high because the Fed has waited so long to deal with inflation, this is the second highest level the Fed has started hiking rates at in terms of inflation," Niles said. "You've got a lot of things that are actually very strong indicators that are telling you you're probably going to have a recession next year." 'Very high' risk of recession risk ahead Niles pointed to multiple indicators from soaring inflation to a flattening U.S. Treasury yield curve represented by a smaller gap between the 2-year note's yield and 10-year note. "I think, you know, the Fed is really super behind the curve. I'm not sure they realize how much trouble they're in," he said. "With the Fed probably going to have to get a lot more aggressive than what everybody is anticipating, that's really bad for market multiples because you've got valuations at some of the highest levels we've seen." He said starting rate hikes when consumer inflation is above 4% has historically been associated with recession. The Treasury yield curve also flattened following the Fed's rate hike announcement, and Niles said any subsequent inversion going forward is a "very strong recession indicator." A yield curve inversion is when shorter-duration Treasurys start having a higher yield than longer-term Treasurys. The relationship between 2-year and 10-year yields is often used as a mark of investor expectations for economic growth. Yields move inversely to prices. Niles also said the recent surge in oil prices is also another recession indicator. "Oil's doubled versus the prior two-year average every single time we've had a recession," he said. Oil prices spiked following the outbreak of war between Russia and Ukraine, but have since largely retreated due in part to a resurgence of Covid infections in China . Stock picks In this environment, the investor said the firm is trying to find long duration investments and is looking at stocks with the following attributes: Those that did not benefit from the pandemic Those set to benefit from economic reopening as the world learns to "live with Covid" Those with low valuations and currently produce good cash flow and earnings, and "not 10 years in some mythical future where you think they're going to be huge" Some of the companies identified by Niles include U.S. networking firms Cisco , Lumentum and Ciena . Satori Fund also recently bought into Swedish telecom giant Ericsson and Finland's Nokia , he added, citing the three investment cycles in 5G, enterprise and internet giants. In line with the economic reopening theme, Niles said the firm has bought dating app stock Match Group . Other sectors mentioned included cruise lines, airlines, hotels and online travel agents, though the investor did not give specific names. Satori Fund is attempting to balance its portfolio position through taking a mix of short and long positions, Niles said. "The way it works is we generally are running with almost as many shorts as we have longs on the portfolio. And so that's how we're trying to match things up. When the market gets oversold, we cover the shorts, our cash levels go up, let the market rally," he explained. "As the market rallies, we start putting some shorts." "Nothing is going to ride out a 20% … correction in the stock market," he said. "What you're trying to do is hopefully find stuff that can hold in better and for us, we've got short positions that we're using to hopefully cushion the blow."

VIDEO2:5902:59

Dan Niles explains what an aggressive Fed would mean for markets

Street Signs Asia

Satori Fund's Dan Niles said he sees multiple, "very strong indicators" pointing toward a recession next year and picked stocks he believes are better placed to weather the market volatility ahead.