Remember when you were a kid, and your parents warned you not to blindly jump off a cliff just because everyone else was doing it? The grown-up version of that home-spun adage might also include a warning to not blindly dump assets just because every other investor seems to be. But many risk-averse investors seem to be doing just that. Some recent trading days have seen nearly all stocks – even those of healthy companies — being sold. This is unusual, says Portfolio Manager, Ed Perks:
“Things like all 500 stocks in the S&P 500 declining on the same day — this is not something we have seen much historically — and that actually happened over the last month. The correlation amongst stocks is rising to near all-time record levels.”
It’s hard to imagine a scenario in which every stock in the S&P 500 is legitimately worth selling. Professional money managers understand that sentiment can often drive markets – and when that sentiment turns negative, investors may not give even healthy assets a fair shake. But this can create opportunities for those willing to take a deep breath and look closer before selling assets. As Perks notes:
“We are very focused on applying our fundamental research – equity and credit research – to identify opportunities, because when you have these mass, correlated movements, there is likely some opportunity to find value within.”
Market sentiment is such a powerful force that it may even create self-fulfilling prophecies. The European sovereign debt crisis, Perks argues, may even be exacerbated by a vicious cycle involving negative sentiment, as fears of sovereign defaults reverberate into the banking sector. The banking sector then becomes another source of potential trouble and contagion in the unfolding crisis: Read more…
Recently, some analysts and financial professionals have argued that the significant uncertainty plaguing the global economy is to blame for the dramatic volatility in markets. This uncertainty is felt in everything from fears of a “double-dip” recession in the U.S., to turbulent Asian currency markets and the ongoing European sovereign debt crisis. Dr. Michael Hasenstab, SVP and Co-Director, International Bond Department, Franklin Templeton Fixed Income Group® took a few moments recently to help us make sense of these situations.
On the European Sovereign Debt Crisis:
S&P’s recent downgrade of Italy’s sovereign debt sent shock waves through markets as fears of contagion spread. But Dr. Hasenstab does not believe markets should view Italy’s debt situation as equivalent to Greece’s; Italy, he says, is in better shape:
“In the last couple of decades, Italy has actually undertaken pretty significant fiscal reform efforts to stabilize its debt-to-GDP ratio, unlike Greece which was on an explosive and expanding path. It’s true the level of debt is high in Italy, but it’s also stable, and it is true that growth rates are fairly low, but they have also been fairly responsible in running good fiscal balances. So, the debt conditions in Italy are nowhere near as problematic as they are in Greece.”
As contagion fears spread, however, investors shun the debt of countries they perceive to be at risk, driving up those countries’ interest rates. This makes debt harder to service, turning the risk of contagion into something of a self-fulfilling prophecy. But even if market conditions were to pressure a large major borrower like Italy, Dr. Hasenstab thinks it’s unlikely this would result in a systemic crisis:
“The European Central Bank has shown willingness when necessary to intervene in the government bond markets to prevent contagion effects from impacting countries that are not actually insolvent. Most importantly, it is providing a tremendous amount of liquidity to the banking system. It is true that European banks are a bit more credit-constrained than those in the US because they haven’t made a lot of the writedowns, but they also have tremendous access to liquidity, and the capitalization of the major European banks is certainly adequate. So, provided the ECB continues to provide a ring-fence, the situation in Greece is unlikely to be systemic. It is going to be volatile… and there certainly are tail risk events that we are monitoring very closely. But, I think it actually could be a positive event for Europe to move beyond this. The market is already pricing in a significant restructuring so it wouldn’t necessarily become a surprise and as long as the ECB is there to provide the backstop and prevent contagion, we think it’s manageable.”
For many of us, our experience with the utilities industry is limited to a passing admiration of electricity grids and gratefulness that our running water and power work as they should. But for portfolio manager, John Kohli, who specializes in domestic and international equity research analysis of utilities for the Franklin Equity Group, utilities run his daily life –literally and figuratively. In the excerpted conversation below, he’ll help us explore recent dynamics in the industry.
On Utilities Regulation:
Thanks to deregulation, Kohli says some utilities have “stretched” the definition of a utility company. While this presents an interesting opportunity for the company to diversify, investors may not be buying into what they thought. When is a utility not a utility company? When it’s a utility/international telecommunications company.
Another wrinkle in the utilities space is that regulatory environments vary widely between jurisdictions. As Kohli notes:
“We like to have a high level of comfort in the regulatory environment…When you venture outside the U.S. you start to lose some of that perspective on what’s going on from a regulatory policy perspective. A classic example is with the recent Euro situation. We have seen some countries in Europe who have gone away from their traditional regulatory constructs in order to stimulate growth in their economy. Italy just instituted what they’re referring locally to as a “Robin Hood tax” where they’re taxing the utilities higher than they have historically, and that’s led to significant volatility in some of those companies.”