5 Predictions for the Global Economy and Markets
Want to know which way stocks and bonds will head next? I’ve often found the most accurate prognosticators among first-class bond fund managers. Top stock fund managers usually spend most of their time researching individual stocks. But it’s nearly impossible to be a successful bond manager without getting the big picture right most of the time.
I talked recently with two top bond mavens: Kathleen Gaffney, co-manager of Loomis Sayles Bond (LSBDX), and Michael Hasenstab, lead manager of Templeton Global Bond A (TPINX). The former is no-load (and a member of the Kiplinger 25); the latter generally imposes a 4.25% sales charge.
Gaffney and Hasenstab are independent thinkers. So what surprised me was how in sync their views are on the big issues. Following are their five most important predictions:
The euro zone will come through its crisis and emerge stronger than ever. Greece may exit the euro zone, but Italy and Spain certainly won’t. Southern European countries will have fiscal discipline imposed on them as the euro zone becomes more centralized. Workers in most of Europe will become more productive, and their pay and benefits will become less generous. Meanwhile, German workers will get paid more and will consume more than they do now.
Don’t expect any of this to happen quickly and without continued brinksmanship by both Germany, which wants to curtail government spending by southern European countries, and most of the rest of the euro zone, which favors economic stimulus to promote growth. “It’s going to be messy,” Hasenstab says. Gaffney says Europe is already in a mild recession and the European Central Bank will “start printing money” soon.
The euro zone will hold together simply because its collapse would be catastrophic for its member countries. “It would make Lehman look like a warm-up,” says Hasenstab, referring to the September 2008 collapse of Lehman Brothers, which triggered the financial crisis. Germany has become an export machine largely because of the weak euro, Gaffney says, and its exports would collapse if it had its own, much stronger currency.
Emerging markets face troubles. The recession in Europe and slow growth in the U.S. will generate problems for some emerging nations, which have thrived by exporting to developed countries. But China will keep growing at a relatively rapid pace and won’t experience a “hard landing,” says Hasenstab. “Growth will slow in China but will still be robust,” says Gaffney. Hasenstab says that China’s aging population (a byproduct of its policy of limiting families to one child each) will lead to higher wages and higher prices for its exports. “China will be exporting inflation,” he says
U.S. stocks are attractive. The U.S. economy is growing at a meager pace of 2% annually, but that looks good compared with the rest of the developed world, says Gaffney. Her bond fund has 6% of its assets in stocks, such as Bristol-Myers Squibb (BMY), Intel (INTC), Microsoft (MSFT) and PPG Industries (PPG). “The fundamentals are better here than in Europe and the emerging markets,” she says.
Junk bonds are attractive, too. Bonds issued by U.S. corporations, particularly high-yielding “junk bonds,” offer good value, says Gaffney. (See Better Yields from 4 Top Junk Bond Funds.) She sees little danger of a recession, which would be especially harmful for the weaker companies behind junk bonds. If you can stomach the risk, Loomis Sayles Bond is a good diversified choice. The average credit rating of its bond holdings is double-B, meaning there is a real risk that some of the underlying companies will default. (Hasenstab didn’t express opinions on stocks and junk bonds.)
Watch out for a fiscal crisis in the U.S. The U.S. has benefited by being “the cleanest dirty shirt” among major developed economies. But at some point, Hasenstab and Gaffney warn, the bond market will turn a jaundiced eye on U.S. Treasuries, currently the ultimate safe haven for investors (see Treasuries Gone Wild). “Partisan gridlock in the U.S. is a problem,” Gaffney says. It has prevented the major political parties from undertaking a serious effort to bring down the federal debt in the coming years. Just as in Europe, it may take a crisis to change the mindset of U.S. lawmakers.
Steven T. Goldberg is an investment adviser in the Washington, D.C. area.
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