Who doesn’t love a bargain? Scoring something sought-after at a discount can be as thrilling for shoppers on Main Street as deal-hunters on Wall Street. Ferreting out finds takes time, though, and not everyone has the patience—or the resources—to do that legwork. But Katrina Dudley, portfolio manager with Mutual Series® , is a savvy stock shopper with ample amounts of both. Read on for a taste of her stock-picking approach as inspired by the Mutual Series’ guiding principle: “buy a dollar’s worth of assets at a discount.”
- Macro considerations are important, but they don’t change our stock-by-stock selection process
- Volatility is here to stay, but it can create opportunity
- We’re looking at the company-level impact of macro influences like eurozone austerity
- Many European companies are readjusting their cost base, becoming more competitive Read more…
Many investors were leery about diving into the market last year, and who can blame them given global debt debacles, job and housing concerns, and a shaky growth outlook. While the market still faces these crosscurrents, the S&P 500’s best January performance in more than a decade 1 and the recent reprieve in a key measure of market volatility are providing hints that gun-shy investors might be dipping a toe back in.
Easier said than done for some. After the rollercoaster that was 2011, trying to explain why now seems like a good time to venture back in still sounds a little crazy. But for those who are looking for some perspective, you’ve come to the right place. Read on for why Ed Jamieson, president/CIO of Franklin Equity Group®, Peter Langerman, president/CEO of Mutual Series®, Gary Motyl, president/CIO of Templeton Global Equity Group, and Mark Mobius, executive chairman of Templeton Emerging Markets Group, all think it might be time for investors to consider taking the plunge. In brief:
Gary Motyl: “We do expect the global GDP environment to remain challenging—looking for slower global GDP growth but still growth.”
Ed Jamieson: “The market appears more relaxed about world events than one might imagine.”
Peter Langerman: “If you look at one of the commonly referenced measures of volatility, the Chicago Board Options Exchange Market Volatility Index, or the VIX, we are actually at a level which isn’t that far above where we were all the way back in 2007.”
Mark Mobius: “I don’t believe China’s economy is going to experience a hard landing. I expect the China plane will keep on flying.” Read more…
Value, like beauty, is in the eye of the beholder. One man’s splurge is another man’s thrift. So how do you define value? And where do you find it? Alan Chua, portfolio manager with the Templeton Global Equity Group and known value-hunter, has been spanning the globe to uncover it. You might be surprised to learn that the much-maligned eurozone, embroiled in an ongoing debt crisis, also happens to be a place he feels attractive valuations are ripe for the plucking. Top takeaways:
- Chua sees “attractive opportunities” in the eurozone, based on valuations
- Sectors to watch: pharmaceuticals and technology
- Opportunities in Asia
- Chua remains cautious on the U.S., as valuations there are not as cheap as Europe, but there are promising signs Read more…
Some market-watchers believe that markets have been dominated by fear, inspiring investors to panic and liquidate investments that are otherwise fundamentally sound. They throw out the baby with the bathwater, so to speak. Dr. Michael Hasenstab, SVP and Co-Director, International Bond Department for Franklin Templeton Fixed Income Group, doesn’t scare so easily, though. As he reiterated recently, he actually sees times of market panic as opportunities to make investments where he sees long-term value. The key thoughts he shared:
- The challenge during periods of volatility is that, although investors can take a short-term hit, this volatility can create opportunity.
- Fears Europe will sink Asia appear “overblown.”China is not likely to see a “hard landing.”
- The eurozone drama continues to unfold.
- Chris Molumphy: “The labor markets certainly aren’t in great condition, but the trends seem, in our view, to be positive.”
- Roger Bayston: “We do not expect any meaningful policy changes regarding the future of Fannie and Freddie until after the U.S. Presidential election this fall.”
- Michael Hasenstab: “It is absolutely essential that a number of these European policy measures that were started are followed through on.”
- Eric Takaha: “We have been viewing the financial market gyrations over the past year as longer-term investment opportunities.”
- Rafael Costas: “By now everybody knows that 2011 was, in the minds of many, a surprisingly strong year for municipal bonds, but it was, however, a pretty uneven year.”
The idea behind fixed income is to have a predictable amount of money coming in at predictable intervals. Against a market backdrop that’s only predictable in its unpredicatability, the promise of a steady income probably sounds pretty alluring to a lot of investors right now. So, as we emerge from a very volatile 2011 and wade into what may well be a similarly volatile 2012, how’s the fixed income space sitting? Great question! We’re glad you asked.
Chris Molumphy, CIO – Franklin Templeton Fixed Income Group®: U.S. Fixed Income Overview
The labor markets certainly aren’t in great condition, but the trends seem, in our view, to be positive.
Partially driven by the improved jobs picture, the consumer, generally speaking, appears to be reasonably healthy. The corporate sector continues to be a source of strength for the overall economy. And, of late, we are finally seeing signs of some hiring in the corporate sector. Our outlook for inflation is that it is likely to generally remain benign in 2012.
Now, having said that, we’re not without challenges. Real estate certainly remains stubbornly problematic and likely will remain a headwind in the overall U.S. economy. In our view, though, valuations—broadly speaking—are near their lows. Despite the downgrade mid-year, we still have not really made much progress on the federal debt level in the United States. We ended fiscal 2011 with a significant deficit of roughly $1.3 trillion, or approximately 9% of GDP. And, finally, we continue to work our way through the sovereign debt crisis in Europe. While volatility could certainly persist as we look through the first half of 2012, we’re cautiously optimistic that we will see some resolution this year.
In sum, our view is that the fundamental backdrop is reasonably constructive as we enter 2012 and, as the market inevitably trades on these fundamentals, that should bode well for a number of different fixed income sectors in the coming year.
Roger Bayston, Senior VP – Franklin Templeton Fixed Income Group®: Fannie and Freddie
It’s been over three years since Fannie Mae and Freddie Mac were put into government conservatorship. With their future in doubt—and it should be noted that both organizations have current mandates to shrink their portfolios—the U.S. Federal Reserve has been there to pick up the pieces and try to keep the market-driven mortgage rates low. This was one clear intention of the quantitative easing policy now known as QE-2, announced in the fall of 2010.
Should the Fed announce further QE measures, we would expect they would continue to focus on attempting to keep mortgage rates low to support U.S. residential real estate. Continuing to buy agency mortgage pass-throughs will likely be one of their tools. In addition, we expect them to continue to help owners deleverage their household balance sheets through refinancing at the very low rates available. This requires working with banks and mortgage servicers to clear current hurdles that are preventing large amounts of refinancing from happening.
We do not expect any meaningful policy changes regarding the future of Fannie and Freddie until after the U.S. Presidential election this fall. Given the huge debt loads each organization carries, politicians are leery of supporting decisions that might add to the very difficult U.S. fiscal debt position.
Dr. Michael Hasenstab, Co-Director – International Bond Department: Impact of Eurozone Woes
One of the key challenges in 2012 will be, I think, implementation: it is absolutely essential that a number of these policy measures that were started are followed through on. There are six key issues with implementation that we need to watch and I expect that, within the next three to six months, we will get clarity on a lot of them.
1) European fiscal union. I think this is the cornerstone of putting Europe on a more sustainable path, and we need to continue to see that followed through.
2) Budget follow through in Italy. Italy has passed some very austere and difficult budget measures. We need to see follow through there and make sure there isn’t backsliding, and we need to see some follow-through on the labor market reforms.
3) Greek restructuring. We have always maintained a view that Greek’s debt was insolvent and it was a matter of time. I think that time is quickly approaching and, hopefully, we can have a restructuring and move beyond that. I think it would be healthy to no longer have that in the headlines, but it could create some short-term volatility.
4) Will we see ongoing QE out of Europe? Will they continue to commit their balance sheet to the Central Bank in periods of stress? So far they’ve indicated a willingness to do this, and I think this will be important to monitor.
5) Emerging market monetary policy. We’ve seen some easing in monetary policy in emerging markets. This has helped cushion those economies against a global slowdown. One of the strengths that emerging markets have is the ability to actually lower interest rates. But we need to make sure they don’t get behind the curve and ease too much, given that demand conditions are actually pretty reasonable in those markets.
6) U.S. debt dynamics. In this political year, U.S. debt discussions seem to be completely at an impasse, and that will be important.
Eric Takaha, Director – Corporate and High-Yield Credit Group: Corporate, Leveraged and High-Yield Debt
If you just focused on the headlines dominating the news in 2011 you could have reasonably assumed that 2011 would’ve been a fairly difficult year for corporate credit. However, when you look at valuations, while they did cheapen, overall returns were actually positive.
In particular, U.S. corporations posted positive year-over-year earnings growth throughout 2011, even during the more difficult U.S. economic environment experienced earlier in the year. Valuations across the corporate credit markets in 2011 were driven more by the negative headline news stories than by the generally supportive credit fundamentals. Consequently, while total returns were positive, yield spread valuations did cheapen, particularly in the latter half of the year.
Looking at the leveraged loan sector in the investment-grade corporate markets, we see similar trends of cheapening valuations over the course of 2011, diverging from the credit fundamentals that were being reported by many issuers. Similar to the high-yield sector, the leveraged floating-rate bank loan market has also benefited from supportive fundamental credit trends.
Rafael Costas, Co-Director – Municipal Bond Department: Municipal Bond Market Overview
By now everybody knows that 2011 was, in the minds of many, a surprisingly strong year for municipal bonds, but it was, however, a pretty uneven year. If you’ll remember, the first part of the year was filled with negative headlines and underperformance following the tough end of 2010. However, by the end of the 2011, as people started to realize that the worst-case scenario—calling for hundreds of billions of dollars in defaults—was nowhere close to being what actually would happen, demand started coming up. Demand was also fueled by persistent fears about the global equity markets, particularly Europe, that sent more money coming back into the “perceived” safer investments of Treasuries and municipal bonds. We do want to make sure, however, that we temper expectations for 2012. It was a great year, but to expect double-digit returns in municipal bonds is not realistic, it doesn’t match up with history.
I would caution everybody to be mindful of the really good numbers that some of our leveraged competitors may be posting. The leverage process amplifies returns in the upside, but it also amplifies them on the downside, and so before people get too enticed by double-digit returns, I remind them to look at the performance of any instrument on the down years—and you have plenty of examples recently—so you can see what the downside potential of those instruments is and decide whether you or your client can handle that kind of downside risk before you invest.
We’re not even a month in, but it looks like the global economy, Europe and earnings may be the big attention getters in 2012. The equity markets have been off to what could be called a mild rally during the first half of January, but they’re still reacting to eurozone worries like a baby with a jack-in-the-box; they know something big is coming, but they’re not sure when, and when it does, they jump. It’s a fair enough reaction. Last year’s rough and tumble volatility wasn’t exactly a cake walk.
That wild ride doesn’t appear to be over, though, as hopeful outlooks for smooth sailing were noticeably absent from the slate of 2012 market predictions. But if you can’t wrap yourself up in a warm blanket of false promises, at least you can pull up a chair to the grown-ups’ table and take a practical survey of the landscape. Doing just that, Franklin growth manager Grant Bowers suggests heading into 2012 with realistic expectations:
Hindsight may be 20/20, but perfect foresight sure would be nicer to have. The future is unknowable, of course, but that doesn’t mean we have to go blindly tripping into it. Somewhere between the randomness of throwing a dart at a board and the fictional “vision” of E.S.P. lays the gray area of the educated guess. What use is 20/20 hindsight, after all, if we can’t use it to learn some lessons?
Fortunately for us we have access to industry experts Ed Jamieson, Peter Langerman, and Gary Motyl, three men with about 75 years of investment experience between them. You’ve already read as they opined on the future of Europe and the potential market impact of the U.S. presidential election, and in this post you’ll hear from them one more time as they analyze trends, possibilities and probabilities and postulate on what may be in store for the markets in 2012.