Chief Investment Manager, Haig Bathgate, discusses the latest developments in the financial markets. Watch Haig's video here.
David: Hello and welcome to the Turcan Connell Asset Management videocast. This is for the quarterly financial market overview and here to talk to me today is Chief Investment Officer, Haig Bathgate, and we're going to chat about what's going on in markets at the moment. I suppose we've seen quite a lot of volatility in markets, we've seen a big dip in October, things have come back since then. This is a pattern we probably thought would happen coming up to interest rate increases, isn't it?
Haig: Yes, absolutely, it's very consistent with the previous periods of interest rate normalisation. We saw this in the early 90s and late 1993, early 1994, and what we can see is, as investors are trying to work out when the first interest rate increase is going to come, and central bankers start to oscillate and change their views frequently, the markets start to interpret news in different directions and volatility picks up.
David: And the interesting thing, I suppose the paradoxical thing, for people is that good news can mean markets fall, bad news means markets can fall as well. Isn't that right?
Haig: Yes, and that's what makes it different this time. Actually, what we think is going to happens is we're going to see an interest rate increase in the US first as we've felt for a long, long period of time and that's going to come against the backdrop of an economy which is improving more quickly than people were expecting. That's going to force central bankers to increase interest rates before the market is expecting and that precipitates a sell-off on the market. So, you're right, the kind of sell-off that we're likely to see the next time is against a backdrop of an improving market economy rather than what we saw in 2007, 2008 when we had the credit crisis.
David: And you mentioned there that the US is doing very well economically. Interestingly enough, Europe seems to be a bit slower than people thought and yet there's value in Europe. You know, it's quite often that you can find economic conditions don't necessarily dictate what's going on in stock markets, or what's good in stock markets?
Haig: That's absolutely right, that's the case in the US, now it's the case in Europe. We like, and have liked, the US economy for some time now. That means we favour dollar-based assets, we favour inflation-based assets in the US, but we're not buying any more exposure to the US stock market because the US stock market is already pricing in a lot of good news in the US economy. Conversely, as you say, in Europe the economy is in a pretty bad state. We don't think that's going to turn around anytime soon but we think that the market expectations of how bad it is outweigh the price that you're having to pay for that so we think the European stock market, for example, looks good value. There's going to be very little wage growth in Europe any time soon so if you're a company making widgets in Europe, that's a good environment to be in if you're selling into the US economy for example. The US economy picks up, demand for your product picks up but, consequently, it doesn't have any pass through to underlying wage cost because the European economy is not in a great position at the moment.
David: And the fact that Europe's thinking about doing a quantitative easing thing, is that likely to lower the Euro and probably make things better for companies as well?
Haig: I think that's one of the things we're going to see that's different from what we've seen before. For the last 4 or 5 years, every time the European stock market has appreciated, we've seen the Euro appreciate as well. And, I suppose, surprisingly, the Euro has been incredibly robust throughout this period but it's got to be remembered that the whole of Europe, in aggregate, operates a current account surplus, so in aggregate, they're exporting more than they're importing and that's means there's natural support for the currency. But, as you say, we've seeing a break from convention in Europe, we're seeing Mario Draghi, who's made it very clear that he's going to start printing as much money as is allowable and, as a result, we think the Euro will depreciate and that will spur on the European economy. So, we can see the European stock market increase but the currency depreciate and we're positioning portfolios for that accordingly. For the first time in a long time we've now been hedging out our Euro exposure.
David: And what about the UK, because it's kind of converse really to what we're seeing in Europe, where expectations have got so low that makes a good value. You think in the UK things are not quite as good as people have been talking about?
Haig: Absolutely, it's been a long held view. Ultimately the UK is a geared player in Europe so when Europe's doing well, the UK benefits. When Europe's doing badly, the UK doesn't perform so well and that's exactly what we're seeing at the moment. We're starting to see the service data a couple of weeks ago was really bad and, again, the expectations in the UK got way, way ahead of themselves so we're starting to see that unravel now. Where we expect to see that expressed is in the currency, but it's got to be remembered as well that in the UK we're operating a twin deficit – we are spending more than we're bringing in in the form of tax receipts and we're also importing more than we're exporting, so that's not a good position to be in. We already have a very high debt to output ratio as measured by debt to GDP on the back of effectively partially nationalising the banking sector a few years ago.
David: We've talked a lot about the UK. We've talked a lot about Europe. What's happening in the rest of the world? What do you see happening in Asia and emerging markets?
Haig: We think there's a lot of difference between different emerging markets. So, as we've talked about previously, emerging markets are treated as an homogeneous grouping of countries but clearly they're not. You have Latin America in one part, you have Asia in another part, they constitute the majority of emerging markets, but the factors that drive them are in some cases similar, in many cases aren't. Our preference is for Latin America at the moment, given our strong belief that the US recovery is becoming self-sustaining. That works slightly to the detriment of Asia, although when emerging markets sell off, we see almost 100% correlation between Latin America and Asia, so we would expect that to change over time. However, it's too early to gain exposure at the moment. We know from history that when interest rates start to normalise in the western world that precipitates a sell-off in some of these emerging markets, which makes sense because you have a lot of US investors who repatriate their assets because they can get a better return in dollars. That creates natural selling pressure in emerging markets. However, that's the time to buy and the area we think we're going to buy into is Latin America and we've being doing a lot of work on that in the previous few months.
David: And Japan has been quite an interesting investment area for people recently given the changes by the central bank there. What do you think is happening there?
Haig: We're still very positive in Japan and we've hedged the currency we think abenomics is working. Markets aren't giving it enough time to show through yet but we're still maintaining our exposure there, we're hedging the currency and we think that that will shine through in the coming months.
David: Thank you very much, Haig. For more information on the services at Turcan Connell Asset Management, or on the views of Haig and his colleagues, go to www.turcanconnellwealth.com.
This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.