The Strategists Panel is one of the most popular annual sessions held at IMCA’s national conference, and this year it didn’t disappoint.
Jeffrey Kleintop of LPL, Jeffrey Knight of Columbia Management and Benjamin Pace of Deutsche Bank regaled the packed session in Boston with insights and plenty of quotable takeaways. For example, when Kleintop was discussing the opportunities in fixed income, he was blunt and humorous at the same time.
“There are no opportunities” in the bond market, he said, and “there’s no ‘high’ in high yield.” Instead, he recommended that advisors put some “James Bond” in clients’ portfolios, by which he meant not “cool gadgets” as seen in the Bond movies, but alternatives like REITs, business development companies (BDCs) and MLPs.
Knight said that “you could argue that bond yields are way too low,” but “when inflation does get growing it’s likely to be disruptive” to fixed-income investors. He counseled that investors should carefully watch the wage inflation numbers as a precursor to generally higher inflation.
Speaking of the Federal Reserve’s quantitative easing program, Pace said that “[Ben] Bernanke thought he could glibly taper,” but that the ‘Taper Tantrum’ was a good experience for investors and the market. When will QE end? Echoing a prediction made earlier in the conference by Princeton economist (and former Fed Vice Chairman) Alan Blinder, Pace believes the Fed will wind down tapering by October or December of this year. That will be good for the market and economy, he said, because there was a “danger of becoming addicted to QE,” but the end of the Fed’s heavy buying of Treasuries and mortgage-backed securities will mean that “the dislocation will go away.”
Kleintop argued that “inflation bottomed in February” of this year, and that from his listening to many corporate earnings calls, he “heard a lot about pricing power,” so he suspects there will be some price increases in the economy.
If bonds don’t offer opportunity, what about stocks? What about emerging markets? What’s the danger from Russia’s meddling in Ukraine? Kleintop was optimistic, noting that as has been the case with other geopolitical disruptions of the past few years in Egypt, Syria, Iran and North Korea, the Ukraine situation was “troubling, but did not derail the markets.” Vladimir Putin, he said, is “trying to re-establish a buffer zone” between itself and Western Europe that it had lost since the Iron Curtain fell and the Eastern bloc countries began to embrace capitalism. Pace agreed somewhat, saying “Ukraine is masking Putin’s economic underperformance,” while “Koreas is now viewed as China’s problem.”
As for the bull market, Kleintop asked rhetorically, “What ends a bull market?” before answering, “an inverted yield curve,” which “will take a while to achieve.” To get to that inversion, “we’d need a 4% fed funds rate,” which he suspects won’t occur, if it ever does, before 2016 or 2017.
Pace acknowledged that the emerging markets are slowing down, but that “worldwide, economic growth will be led by the U.S.” While at Deutsche he said “we’ve encouraged clients over the last 10 years not to be so dollar denominated” in their investments, “now we’re asking for them to come home.” That’s why “we’re exploring emerging market debt” that’s in dollars, he said, arguing that “a lot of these [EM] countries are at or near investment grade.” Pace said “we’d rather stay with the developed markets,” but reported Deutsche had “taken Japan down to a neutral” rating due to recent Bank of Japan moves. For Knight, emerging markets equities “stand out as a cheap asset class,” outperforming developed markets equities since February.
“Last year the market was led by the U.S. and Japan,” he said, but this year it will be led by the emerging markets.
Kleintop agreed, saying that emerging markets “used to trade at a discount” in the 1990s before “they got to a premium” in the 2000s, but now he thinks some emerging markets have “attractive valuations.” Kleintop said “we’re attracted more to Asia” these days, especially the Philippines and Indonesia, and suggested that “valuations could drift higher.”
Turning to municipal bonds, Kleintop says he thinks “there’s still value there,” and says investors were distracted by the high-profile muni bond problems with Detroit and Puerto Rico. “There was some throwing out of the baby with the bathwater,” he said, while Pace argued that munis with durations of less than five years are overvalued, but “longer than that there are opportunities.”
The strategists finally turned to domestic politics, with Kleintop arguing that if the Republican Party wins control of the Senate in this year’s midterm elections, “a lame-duck Obama” would be good for businesses. They’ll begin to spend more, “not just on buybacks,” but investing in equipment, facilities and employees, he believes, since no new legislation that could affect them will be coming out of a divided government in Washington. Knight agreed that “a lame duck would be a bullish window,” but that “where we are now is troubling.”
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