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January 05, 2015 at 09:13 AM
Buckle up, investors, because the new year is likely to be volatile.
That is a consensus view from not one, but rather all the experts at Janus Capital Group, including Nobel Prize winning economist Myron Scholes, who assumed the fund company’s chief investment strategist role in 2014.
The Denver-based investment firm has kicked off the new year with an advisor-directed presentation of the range of views held by its portfolio managers, including bond fund manager Bill Gross.
The Janus experts don’t agree on every issue—the firm is showcasing the diversity and breadth of its talent pool—though on the question of volatility, all expect a wilder than usual ride, with Scholes calling for investors to boost liquidity, even at the expense of maximizing return.
“Now would be the time to avoid overreaching for the highest returns,” is how Scholes puts it, adding that “investors should gravitate to more liquid investments and consider increasing reserves at the margins. I would suggest paying up for liquidity at this juncture, even if it means taking a slightly lower return on those investments.”
The reason for the increased volatility?
“In the U.S., there is uncertainty about whether the Federal Reserve will continue to keep rates low in the face of increasing evidence the economy is improving,” comments Scholes. “Europe is teetering on the brink of deflation, and individual countries in the region differ on how to stimulate the economy. There is increasing instability in the Middle East. China and India are trying to make fundamental shifts in what drives their economy, and there will be bumps along the way.”
The Nobel Prize winner calls for increased diversification and warns that if a shock occurs, “a number of investments that looked unrelated before are going to look much more related during the volatility.”
The shared expectations on volatility make liquidity strategies a common theme in the Janus commentaries, a view Bill Gross of the Janus Global Unconstrained Bond Fund outlines in a discussion on global growth. Gross recommends short-maturity bonds, and is generally gloomy about global growth prospects (and indeed gloomier than others of his colleagues).
“Asset prices depend significantly on economic growth, and that isn’t good news for investors in 2015,” Gross says. “Aside from the United States, the growth outlook for developed countries and many emerging ones is subpar … Almost all economies are facing structural headwinds such as aging demographics, technological advances which depress job growth, and importantly, still highly levered private and public balance sheets.”
Gross’ colleague George Maris of the Janus Global Alpha Equity and Janus Global Select Fund expressed a far greater degree of optimism — about U.S. stocks in the short-term and global, especially Chinese, stocks in the medium to long term:
“As rising GDP leads to improved sales, companies with fixed operating costs should register expanding profit margins,” Maris comments. “This, along with lower energy prices putting more dollars in consumers’ pockets, is supportive of U.S. stocks. Yes, equities have become more fairly valued, but in comparison to bonds, cash or real estate, they remain a compelling asset class.”
That U.S. economic growth should support global exporters like Japan, Germany and China, adds Maris, who is especially sanguine about Chinese prospects:
“For China to be trading at a substantial discount to European market multiples, while recording 7% or even 6.5% real growth, seems like an attractive opportunity. Many investors are missing the big picture. For those who have a longer-term view and can withstand some short-term volatility, I expect exposure to this country to pay off over the medium to long term.”
