We don't yet know how much economic weakness will spread from the U.K., but low interest rates should prevent a global financial system crisis, says Nuveen chief equity strategist Bob Doll.
Jason Stipp: I'm Jason Stipp for Morningstar. Markets fell hard on Friday after the U.K. voted to leave the European Union. I'm here with chief equity strategist and portfolio manager Bob Doll of Nuveen to get his take on the situation. Bob, thanks for coming in today.
Bob Doll: Thank you, Jason.
Stipp: For people who are trying to understand what this means for the U.K. economy specifically, there are a lot of unknowns, but what's your take on the big worry points there?
Doll: The U.K. has decided to leave the European Union. The problem is, you don't just do it. It takes a couple of years at least to work it out, and we don't know what that process is because nobody has ever done it before. So it's the uncertainty that causes growth to slow, and the prospect of U.K. recession is not out of the question.
Stipp: Is the prospect of recession because businesses, seeing the uncertainty, pull back?
Doll: Yes. If I don't know what my policy is going to be, I withdraw a bit. If I'm a consumer and I don't know which end is up, I might not buy the next whatever I'm thinking about buying, and all you need is a little bit of that to cause a recession.
Stipp: Right now, we have this uncertainty with the U.K. If I'm a U.S. investor, maybe I've got a little bit in Europe, maybe a little bit in U.K., but the markets are down big in the U.S. as well. So what's the concern here, and what should I be thinking about sitting on this side of the pond?
Doll: The concerns are several. One, how much of the U.K. weakness will bleed into the rest of Europe, and how much, in turn, will bleed to the U.S.?
Two, the uncertainty around the financial system. Are there risks to the financial system? I think because central banks have come along and said, "We will do whatever it takes," that fear will disappear over time.
The third one, I don't want to sound overly dramatic, but this is yet another step toward the whole issue of closing borders. "I'm not happy with the share of the pie I have; therefore, let's not globalize, because that might take my job away." Terrorism in many parts of the world is also causing people to be fearful: Close the border. It's why you've seen populism in parts of Europe, in the U.S., with Donald Trump and Bernie Sanders doing better. It's part of a bigger picture, in my view.
Stipp: You mentioned, risk spreading to the eurozone, or risk spreading globally. The last financial crisis that we had, there was risk of global contagion. How would you rank what we have here with the Brexit versus what we saw about eight years ago?
Doll: I hope I'm not Pollyannaish when I answer this way, but much, much lower--in part because of where interest rates are. Back then, interest rates were up here. Now, interest rates are kind of down here, let's call them zero to exaggerate, to make the point. Zero interest rates cover up a lot of problems and a lot of sins.
Stipp: Let's talk about where valuations are right now. We saw a big drop today, but you take the market with a little bit more perspective and ask, is it that big? Have we fallen a lot from where we were?
Doll: The market is back to where it started the year. Our thesis in our conversations all along have been, "This is a year we're going to frustrate the bulls and the bears." Well, today, we're frustrating the bulls. I think we're going to have this back and forth, back and forth.
Valuations relative to other things are not extended. We've got a 10-year Treasury, relative to the yield on the stock market, approaching 100 basis points in favor of stocks. That's very, very rare, which tells me, in the long run, at these levels, stocks are pretty cheap compared to bonds, Treasuries in particular.
Stipp: Now, if you're a portfolio manager and you're going out looking for opportunities in an environment where there are still a lot of uncertainties, and we don't exactly know what all the knock-on effects are going to be, what's the best way for me, if I do want to go and be a bargain hunter, to do so prudently?
Doll: I think you say: The U.S. economy is OK, not great. U.K. and Europe, I'm really putting question marks.
Therefore, I think you want to make sure you get a lot of earnings and earnings growth from here in the U.S. So, be careful how many multinationals you own. That's pretty basic, but I think pretty simple in this environment.
Stipp: Bob Doll from Nuveen, thanks so much for coming in today and for your take on the Brexit.
For Morningstar, I'm Jason Stipp, thanks for watching.
