... but they also see enticing opportunities.
Although stock markets have rebounded sharply since last March, it is unlikely many investors are feeling complacent--not with unemployment rates still steep and nearly every state government facing severe budget cutbacks. Late last week, attention-getting policy decisions by political leaders in the United States and China added further uncertainty to the mix.
At least the most critical risks to the global financial structure have been addressed, you say? Not so, according to two international-fund managers who pay more attention than most to the world's financial, political, and socioeconomic issues. In the minds of Rudolph-Riad Younes of Artio International Equity
Warning Signs Abound
Younes is dismayed by the response to the global financial crisis that began in 2007. As events spiraled out of control, he thought cash-strapped governments had no choice but to allow the most troubled big banks to essentially go bankrupt and then nationalize them. The banks then would be reined in, and consumer spending would be muted for years. And, given the dire state of governmental finances in so many key nations, fiscal policies would have to change as well. Most notably, taxes would have to increase, spending decrease, or both. Higher interest rates would also be required so as to avoid a repeat of the conditions that helped create the housing bubble.
Younes was caught flat-footed when none of this happened. (His funds paid a price in their performance.) As he states in his recently released shareholder letter, "We did not anticipate that [the U.S.] and the rest of the world would so quickly re-embrace and encourage the borrow-and-spend policy ... which had brought the world to the brink." In his view, the results will not be pretty. "The world is re-embarking toward further global imbalance, postponing the painful and necessary adjustment." Can't we have a "soft landing"? No. "Having witnessed failed soft-landing attempts for the [Internet/tech] and real estate bubbles, we fear a similar fate to this one." Governments and central banks should recognize that "sacrifices must be made sooner or later."
The most obvious current bubble he sees forming is in emerging markets, specifically China and India. The overwhelming enthusiasm for these markets and amount of investment pouring in to them help lead him to that conclusion. China and India "are today's version of the Internet" craze, he states, and "we all remember how the Internet craze ended--soberly and painfully."
Not All Darkness
Younes isn't simply a gloom-monger, however. He's not predicting the end is near. When speaking with Morningstar in early January, he conceded he had no idea when the reckoning would come. He said that seemingly overvalued assets can stay at lofty levels a long, long time and admitted that he and his colleagues have an unimpressive record at correctly guessing when such frenzies would end.
Therefore, Younes is keeping watch on several areas for warning signs. One key for him is the level of stock prices in emerging markets, and he does not consider valuations extreme as yet. He's also on the lookout for trade tensions that he expects to develop as countries try to adjust to global "imbalances." Third, he thinks China has overinvested in the wrong areas and that poor allocation of capital will cause trouble there eventually. But given China's "command driven economy with a closed capital account," Younes wouldn't be surprised to see the China train keep rolling for quite a while yet.
With the signals not yet flashing red, Younes actually sees opportunities available in various places. In Europe, he likes blue chips with brand names, saying they're available at reasonable prices because global investors have become unnecessarily spooked by the acute financial difficulties besetting Greece and Ireland. Regarding sectors, he thinks leading food producers are well-placed, and--given that China's government can continue to propel that country's high growth rate for a time--he thinks metals and mining producers around the world are still a good place to look. (He also considers metals and mining stocks "a good hedge against central bankers' malfeasance.")