Neil Hennessy believes we are in a secular bull market, similar to the one that prevailed from 1982 to 2000, and that corporate profits will remain high.
However, that profitability won’t be sustained unless companies begin to hire to foster organic growth, and hiring won’t happen until “Washington” starts to “think out of the box,” just as corporate management has done over the past few years.
So does he believe that our endemically dysfunctional government — “there’s a lack of leadership in both the executive branch and Congress” — can actually start thinking out of the box to solve the three main problems (health care, taxes and regulation) that he says hinder economic growth?
“The real world has to kick in at some point,” he said optimistically at a Midtown Manhattan press conference on Wednesday. “Things won’t continue to stay the way they are” in Washington. “You’re seeing fractures in the House already.”
Hennessy is chairman, CIO and portfolio manager at the firm he founded, Hennessy Funds (HNNA), which crossed the $4 billion in assets mark this year (currently at $4.3 billion) in 16 different mutual funds, and which went public in 2002. In his remarks that accompanied the firm’s annual rebalancing announcement for its Cornerstone Mid Cap 30 Fund (HIMDX), Hennessy focused on the stubbornly high unemployment rate, which he blamed in large measure on his assertion that we’re still “no closer to clarity in Washington for four years” on addressing health care, high taxes and overregulation.
“Companies are still not hiring,” he said, bemoaning the fact that “20 to 25 million Americans who want full-time jobs with benefits are instead getting part-time jobs with no benefits.”
So what should the government do to bring down unemployment?
One thing is to “start treating business as a noble entity, not the enemy,” Hennessy said. Another is to reform the tax system, removing corporate subsidies, like those enjoyed by oil companies, which fail to help the individual consumer.
Always willing to speak his mind, Hennessy voiced approval of Steve Forbes’ flat tax scheme. Speaking of Obamacare, Hennessy said that the Affordable Care Act had "nothing to do with health care," but everything to do with "Democrats retaining the White House" by getting 18-20 million votes by passing the bill.
As for investors, he said they remain on the sidelines, “and who can blame them?” Only 52% of Americans own equities, and over the past two years they’ve pulled $209 billion out of U.S. equities and mutual funds. This year to date, he said, U.S. investors have plowed $94 billion into international investments and only $9 billion into U.S. equities; in the mutual fund space specifically, those numbers are $26 billion flowing to international equities and only $2 billion to U.S. equity funds.
However, he argued that “equities are a value right now,” pointing out that “yields on a great number of U.S. stocks are higher than Treasuries.” Specifically, he said the 30 stocks in the Dow Jones industrials are yielding 2.15%, compared with the 10-year Treasury yield of 2.50%.
“When you add in the tax benefits” and the appreciation of those stocks, equities look even more appealing, he said. As for investing opportunities overseas, he said the “euphoria” in Europe will end, though he believes Japan represents a strong opportunity, due in particular to the economic moves by Prime Minister Shinzo Abe.
“Japan wants businesses and individuals to succeed,” he said, adding that the fabled Japanese savers, who hold $8.5 trillion in cash, in bank deposits, will begin to “buy their own market because they see the potential.” Abe’s tax policies are meant to reward investors, and imposition of a VAT in the country will specifically be targeted to reducing the nation’s debt, Hennessy said (Hennessy Funds has two Japanese mutual funds, HJPIX and HJPSX).
“Hopefully the revolving” political leadership door in Japan has closed, he said, noting that Abe had run only on how he would fix Japan’s economy, and wistfully suggested how nice it would have been if Mitt Romney had solely focused on economic issues rather than social issues, leaving them to Congress and the states.
Moving back to U.S. investors and the equity market, he wondered: when rates rise, “where can investors put their investable capital?” Since emotions are “driving investors,” when rates rise, they’ll panic. He answered his own question by saying that the “only plausible place to put your money is in equities,” dismissing as implausible places money-market funds, real estate, fixed income and foreign markets. Answering a question from a reporter, who reminded him that a bull market in bonds existed during 1982-2000, he responded, "that's over."
Looking at the Cornerstone Mid Cap 30 Fund, a quant fund that follows a rigorous Hennessy process to come up with 30 undervalued stocks with above-average growth potential, he said that the “underlying theme” in 2013 has been “be in the market; the risk is not being in the market.”
Reflecting corporate America’s ability to not only maintain high profitability but to provide shareholder value, he reported that within the HIMDX portfolio, 63% of the companies are offering dividends, and 74% of those companies have increased them this year. Two other common reactions of profitable companies with high cash balances these days — stock buybacks and acquisitions — are also reflected in the fund: 40% are in sotck repurchase programs, while 60% have made an acquisition this year.
Check out A Bullish Neil Hennessy Thinks Now Is the Time for Equities on ThinkAdvisor.