Hot-button issues driving equities (excerpt)On the Trading DeskSM—
By Peter Nulty
What’s moving equity markets around the world? John Manley, CFA, chief equity strategist at Wells Fargo Funds Management, LLC, offers insight in this excerpt of On the Trading DeskSM from Friday, August 30, 2013.
With all the talk of the Fed bringing an end to quantitative easing, is the U.S. equity market ready?
I think the markets in general have done a lot of work discounting that. My own opinion, and it’s only my own opinion, is unless they really slam on the brakes real hard, a tapering would be a sign that the Fed has confidence that the economy could continue without it.
Now, here in the States, of course, the prospect of quantitative easing coming to an end raises the question about rising interest rates. Are they good or bad for markets?
I think the reason rates will go up over the long term is because the world’s and our economy gets better, and they can tolerate higher rates. In other words, if the Fed tries to pick a neutral rate for the economy, one that neither stimulates nor retards the economy, that rate actually rises as economic strength increases. And I think that will happen as we go forward, as the United States, followed by Europe, hopefully followed by more parts of the world, begins to exhibit a stronger economy. Under those circumstances, theoretically, neutral interest rates should rise, and that actually gives the Fed more room to keep U.S. interest rates lower. So it could be that rates actually rise, but if the actual rate rises less than the theoretical rate, the Fed could actually be becoming stimulative to the economy. So under the scenario I foresee, rising interest rates could actually be quite encouraging for the market and for the economy.
Now, around the world, quantitative easing and other post-financial crisis policies are still in progress. Europe has its austerity programs, Japan just launched a new monetary policy; how are those equity markets faring overall?
I think the markets will do fairly well in Europe; I’m rather intrigued by what’s going on there. I think that it was an old-fashioned recession in the sense that it was self-induced. They wanted to slow the economy down. And gradually, as we see the reduction of fiscal stimulus, pent-up demand begins to make itself felt in Europe. And I think slowly it starts to build. The economy begins to reach escape velocity, the monetary pressure has been very positive for some time, and I think Europe can do quite well. Japan’s a different story. Brian Jacobson, my associate, has done a phenomenal job of covering this. Aebenomics may or may or may not work; there are some real risks to lower interest rates that haven’t been factored in. I will say, at least they’re trying something after 20 years there.
While we’re focused abroad, Portfolio Manager Jeff Everett of the Everkey Global Equity team at Wells Capital Management joined us earlier in August, and he thought Europe was a region to watch for good companies, citing specifically that values have been decimated for all they’ve gone through in the past four years; your thoughts on that region?
Sure. I think he’s right. I think that Europe is well valued, perhaps in some respects better valued than the United States. I’m not sure that value is the primary driver in this, but I think what happens is you had a disparity of performance; we now have a disparity of valuation that exists in a lot of places. The difference is that it was caused by something, there was a reason for that, and that was the seeming unending weakness in Europe. As Europe begins to recover, we might be able to close some of that gap. I think that you’re looking at high-quality multinational companies, which I tend to like anyway. If they’re European-based or European-bound, they could actually give you a little bit of a boost to your performance going forward. But I think Europe could begin to attract some money that moves around rather quickly because of the fact that something’s changing over there. And valuations and performance have reflected some of the bad things that went before.
Now, considering all we’ve covered, how are the various sectors holding up? Some better than others, I’m sure. Anything to be concerned about?
We’re underweight utilities because I think they’re more bond-like in nature; the same is probably true with telecommunications. We recently downgraded financials to an underweight, not in every financial sector, but in general. On the positive side, there are three sectors we’re overweight. The one that we’ve been overweight for a while is health care. That’s a noncyclical sector, so it’s a little bit of a hedge. But more than that, I think it’s Obamacare beginning to kick in. Health care spending, I think, is going to rise. That’s going to help the big multinational pharma and device companies. At the same time, some of the mid-cap biotech stocks are starting to see some pretty interesting product progression. Two cyclical areas I like—I like industrials because I think over the course of the next several years we’re going to have to do a lot of infrastructure build for hydrocarbon production, distribution, and refinement, and I think when that’s done down the road, we are extremely competitive versus other countries as far as manufacturing. The other area we just doubled down on is technology; corporations selling technology to other corporations—the tech upgrade cycle. For the big companies, they might not have as much growth or innovation, but again they have quality and size, and they pay—in many cases—decent dividends; those are characteristics that I find attractive in general.
That is all the time we have, John. Thanks for joining us again.
Thank you very much.
The views expressed are as of 9-5-13 and are those of John Manley; Peter Nulty; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.