OppenheimerFunds held on Wednesday a webinar outlining ways advisors can manage expectations and address client concerns during meetings.
Wednesday’s webinar is part of Oppenheimer’s quarterly series addressing issues that frequently come up during client discussions.
One of the biggest recent concerns, of course, is Greece. Moderator Jay Therrien, head of marketing for Oppenheimer’s CEO Advisor Institute, asked how to address clients’ concerns about how what’s happening there would extend to their own portfolios.
“The reality of Greece is that it’s the size of Miami,” Brian Levitt said. “It’s not a big economy. They do need their debt restructured. At some point they’re either going to leave the common currency, which is going to be a disastrous outcome for them, or they’re going to play ball with the European troika.”
He said that if Greece leaves the eurozone, it could be a disaster with rapid inflation and increases in nonperforming loans. Returning to the drachma would make it hard to import necessities like medicine, food and commodities. “If you took out a loan and now you have to pay it in drachmas, you can’t. Either way, it’s going to be a bad macro situation for Greece,” he said, but “should they exit the eurozone, they have a long plight ahead of them.”
In China, he said, there are a lot of things that need to happen, he said, “not least of which is allow creative destruction to emerge.” He said he doesn’t believe problems in China will expand to other markets. “You could see some pressure on some emerging markets, not necessarily because the Shanghai market has done this roller coaster ride, but primarily because growth in China is going to continue to slow.”
Moving away from those current events, Levitt said that the point of the webinar series is to “get away from the 24-hour news cycle” and provide clients with more “historical perspective on how markets have worked over very long periods of time.”
“The reality is as investors we want to have a plan and we want to stick to it and we want to have courage through all this,” he said.
Levitt showed a graph of growth in the Dow Jones industrial average from 1900 to 2014 showing that even though there has been significant volatility over time, it consistently trends up. That’s because it’s “reflecting improving human conditions, improving corporate conditions, improving reforms and restructuring throughout businesses and governments.”
Levitt recommended that to keep clients grounded, advisors should remind them they have to make three decisions correctly before getting out of an investment: “Are you right in getting out? Where are you going with that money? And most importantly, when are you getting back in?”
Therrien asked why, considering the uncertainty in the global market, should clients not stay entirely invested in the United States, especially since markets here are doing so well? Levitt pointed out that while the U.S. is a “very investable market,” there are “great companies all over the world.”
“The problem is investors are getting a little bit whipsawed on their regional calls,” he said. “It’s ‘The U.S. is the best, let’s all pile in there,’ but then U.S. valuations get too high, the dollar gets too strong, the strong dollar slows down trade, then European markets are cheap, the euro is weak, they start exporting themselves to health. European markets pick up, then valuations get a little bit high, the euro gets a little strong, Greece comes up, then the European markets go down.”
Balance is important in a portfolio. “I want to fish in the whole pond,” he said. Most clients probably aren’t, though. Levitt said that the mutual fund portion of a typical U.S. investor’s portfolio is about 70% invested in U.S. funds. “If you include ETFs and individual securities,” he said, “we’re probably closer to 80% in the U.S.”
Levitt predicted that we’re in a period where growth will be strong enough to support corporate earnings, but not enough to “bring forth a meaningful tightening cycle.” He called global central bank policies the “big story” right now.
“What you have now is a disinflationary environment where most central banks around the world — 27 of the 34 major central banks around the world — are either on hold or are easing policy to try to reflate economies and try to support the global economy and financial markets.”
Levitt said there are “no alternatives to global equity” for growth-minded investors. “If we’re going to be in what we’ve been in for seven years of benign growth, low inflation around the world, interest rates are going to remain very low,” he said. Stocks will likely outperform bonds and credit will probably outperform Treasuries. “In a world where growth and income are scarce, in our opinion investors are going to pay up for it.”
When talking about interest rates and their “inevitable” increase, Levitt said that while an increase in the fed funds rate is probably inevitable, the 10-year Treasury rate’s future is less certain. “Ten-year rates kind of bounce between this 1.5% and 2.5% range. The 10-year rate’s going to track the nominal GDP rate of this country,” he said. However, “2.35% when inflation could be a couple of percent is not going to feel that good.”
— Check out Schwab’s Kleintop: 5 Developments Investors Missed While Watching Greece on ThinkAdvisor.