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July 16, 2013 at 08:28 AM
As we slide past the midway point of 2013, the stock market has just produced its first negative, not to mention most volatile, month in the last eight. On the fixed income side, the exit from bond funds was proceeding at the highest levels since 2008, while overseas, politics and bank problems were reviving concerns about Europe’s sovereign debt crisis and its effects on global investor sentiment. For investment thrill seekers, the resulting volatility at period end was probably a lot of fun.
Actually, the first half of the year included enough thrills and chills for just about any investor. The bigger question now is whether we have to keep the seatbelts fastened for the second half. While there are lots of opinions on the near-term prospects for the global markets, there are none more valuable than those of investment managers with ‘skin in the game.’ As a provider of qualitative manager research and due diligence, we’re fortunate enough to be in constant contact with separate account and mutual fund managers competing in their marketplaces on a daily basis. What these professionals say matters, and here’s what we’re hearing them say. Here’s a sampling.
U.S. Equities
Ken Shaw, CFA, Senior Investment Analyst, Envestnet | PMC
Consensus Viewpoint: It’s an overworked expression to be sure, but the majority of domestic managers we talk with are ‘cautiously optimistic’ on U.S. stocks. And for good reason: There are plenty of things to like here at home. Among the positives on the U.S. are strong market fundamentals, a slowly improving economy, increased consumer spending resulting from the housing and stock market rebound, and the significant amount of cash larger firms have accumulated for mergers and acquisitions. There are reasons for caution, too, and managers expressed real concern that a reduction in quantitative easing could cause the economy to stall or even contract. Professional investors also noted that with margins near all-time highs, earnings growth will be impossible without top-line growth from economic expansion. China and Europe lurk in the background with potential to derail U.S. growth.
The Outlier POV: The outlier viewpoint on the U.S. is that massive debt and quantitative easing coupled with political gridlock will bring about another stock market crash and push the economy back into recession. Worst case, the Fed and U.S. government will be “out of bullets” to stimulate the economy leading to a long period of sustained economic suffering.
International Equities
Brandon Smith, Senior Investment Analyst, Envestnet | PMC
Consensus Viewpoint: Within the international equity arena, the most prominent view of managers we talk with is optimism toward emerging markets (EM) equities. Managers commonly point to myriad fundamental factors in EM countries that are supportive of their view, including GDP growth nearly double that of developed countries, a large and quickly growing middle class that should dramatically increase domestic consumption, a fiscal surplus that starkly contrasts with fiscal deficits across developed countries, valuations that are as cheap as they’ve been in the past three years, the continued need for EM infrastructure investment that should accelerate GDP growth, and the strengthening inter-EM trade that should lessen reliance upon more sluggish developed economies. As a result, many managers under our coverage maintain significant allocations to EM equities.
The Outlier POV: Contrarily, a few managers with whom we speak point to a slowing Chinese economy, continued discomfort arising from the Euro crisis, recent declines in EM profitability, and slowing EM GDP levels. These managers have reduced exposure to EM equities.
