Natixis Exchange: Where Political Uncertainty Creates Investment Opportunity
Three leading portfolio experts explain how they invest in a shifting economic and political landscape
Simmering political and economic tensions around the globe may be unsettling to the average investor, but to the pros, these uncertain times are prime conditions for uncovering exciting opportunities.
Discussion at the inaugural Natixis Exchange in New York highlighted just how diverse the opportunities can be as three leading investment experts offered views that crossed borders and asset classes.
“There’s opportunity derived from the inability of places like Europe to get their act together,” says David G. Herro, Deputy Chairman, Portfolio Manager and Chief Investment Officer of International Equities at Harris Associates. “When we have uncertainty it moves prices while in many cases the fundamentals don’t change at all, and that creates opportunity.”
Sentiment about the US economy and markets varies between Herro and the two other panelists, Mary Ann Bartels, head of the research investment committee & ETF Strategy at Bank of America Merrill Lynch, and Boaz Weinstein, founder and chief investment officer at Saba Capital Management.
Bartels believes US stocks are in a secular bull market that began in 2013 and could last up to 18 years. “We had the correction everyone wanted from October to December (2018). We should all be celebrating,” she said.
Herro is reluctant to label the late-2018 downturn a correction, and Weinstein is tempered in his outlook, pointing out that current low levels of volatility in the markets may be reason for concern. After all, complacency often heralds sharp market drops.
Amidst these unknowns, these experts describe a range of fertile ground for savvy securities selection.
Bartels believes technology is in a secular bull market and sees opportunities in the US and globally, particularly among companies racing to build out the next-generation 5G network. She believes the Internet will prove to be as disruptive to our economy as the steam engine was to the agricultural age in the 1700s, and the NASDAQ index of technology stocks will become an increasingly important barometer of the US capital markets.
Herro is building exposure to emerging markets after a harrowing 15% decline in the MSCI Emerging Market Index last year. “Prices have softened and we’ve been able to take advantage of that,” he said.
As a value investor, Herro has often bucked prevailing trends. His emerging market exposure went from more than 20% in the late 1990s to zero in 2014 when hype surrounding BRIC countries (Brazil, Russia, India and China) was at an all-time high and valuations soared. It is now in the low double digits.
Bartels sees value in China, but cautions that some index ETFs are heavily weighted in real estate and financial stocks. “Those would not be our top areas to own,” she said, adding that in China – as globally – the technology sector presents the most exciting opportunities.
Credit spreads are narrow, the yield curve is flat, volatility has eased and defaults are rising. All told, this is a tough time to be a credit investor. “This strikes me as one of the most extreme periods of poorest rewards,” Weinstein says. So where is he finding opportunity? “We’ve been buying volatility, even accepting that in the near term it will be low,” Weinstein said. There are also pockets of opportunity in foreign credit markets – particularly China, thanks to recent volatility, Weinstein said. He recently held debt of a Chinese property developer, and benefited from a yield compression from 13% in December to about 9%.
Weinstein likes fixed income exposure through closed-end funds, due to discounts on the price of the underlying investments and attractive yields. In low interest rate environments, closed-end funds can enhance yields by leveraging assets – borrowing at low rates and investing in higher-yielding securities.
Herro outlines a strong case for investing in European financials, whose prices are down 30% to 40% while paying dividend yields of 5% to 9%.
Despite persistent low interest rates and a sluggish European economy, most financials are seeing loan growth and have been able to make money by cost cutting and diversifying financial services. “As a result, we’ve seen earnings growth and an increase in the economic value of these businesses,” Herro says.
What’s more, the financial companies are stronger than prior to the global financial crises. “Most of the blue-chip European financials are well ahead of where they need to be in terms of capital positions – about double where they were in 2008,” he said.
Still, investing at a time when markets can swing on a Tweet requires a strong stomach – or at least some soothing words from a pro, such as what Herro tells his clients: “Relax, aim high and look forward. If we can use this instability and volatility to buy good businesses at low prices, we will make money.”
A blue chip is stock in a corporation with a national reputation for quality, reliability, and the ability to operate profitably in good times and bad.
A bull market is the condition of a financial market of a group of securities in which prices are rising or are expected to rise.
A closed-end fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund.
A credit spread is the difference in yield between a US Treasury bond and another debt security of the same maturity but different credit quality.
Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns.
Fifth generation wireless (5G) is a wireless networking architecture which aims to increase data communication speeds by up to three times compared to its predecessor, 4G.
Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise bond prices usually fall), inflation and liquidity.
MSCI Emerging Markets Index is an unmanaged index that is designed to measure the equity market performance of emerging markets.
NASDAQ is a global electronic marketplace for buying and selling securities, as well as the benchmark for US technology stocks.
Value investing is an investment tactic where stocks are selected which appear to trade for less than their intrinsic value. Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis. Also called the true value, the intrinsic value may or may not be the same as the current market value.
Working capital is an accounting term that refers to a company’s available capital for daily operations at any given point in time.
Yield curve: A curve that shows the relationship among bond yields across the maturity spectrum.
Equity securities are volatile and can decline significantly in response to broad market and economic conditions.
Foreign and emerging market securities may be subject to greater political, economic, environmental, credit, currency and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
Volatility management techniques may result in periods of loss and underperformance.
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The Natixis Exchange Series is hosted by Natixis Investment Managers in partnership with Barron’s Group. Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.