Markets Fail to Appreciate Shutdown Risk: Goldberg

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Oct. 3 (Bloomberg) -- In today’s “Global Outlook,” Andrew Goldberg, global market strategist at JPMorgan Asset Management and Stephen Macklow-Smith, senior portfolio manager at JPMorgan Asset Management, discuss market reaction to the U.S. government shutdown, the growing strength of the European economy and the state of emerging markets. They speak on Bloomberg Television’s “The Pulse.”

On capitol hill.

Do you anticipate that lasting?

The markets have seen this movie before.

I think the markets are anticipating the outcome which is, eventually the u.s. government will get something done.

I believe that the market is failing to properly price this one in.

There is a little bit more risk this time around.

That doesn't mean it won't get done eventually and i would be a buyer on the dips associated with that.

This is an ugly situation and it is a shameful situation.

America is watching the politicians behave in this manner.

We have our own issues here with politics as well.

Nevertheless, where is this price?

Equities -- you have seen multiple expansion in the last few quarters.

They have outstripped fundamentals a little bit.

That isn't that big a concern and i actually think there are some catalysts coming that will get earnings to grow again.

The market has failed to properly appreciate the risk, not just of the government shutdown but also the potential that the debt ceiling isn't raised in time.

The u.s. will not default on their debt but there will be more market volatility around that as it comes.

There will be some weakness.

Stephen, let's talk about europe.

We have seen this in italy over the last 24 hours.

The senses that european equities are cheap.

Is that correct?

In our view, yes.

European equity earnings haven't moved much for the last five years.

That is against the back run-up weak domestic growth.

It is also the back run-up some volatility elsewhere.

Corporate europe is extremely highly exposed to growth in the rest of the world.

More than 30% of revenues come from outside.

Some global brands make stuff that the world choose up to buy.

-- queues up to buy.

Over the last few days, that exposure has become -- it is not just the last few days.

If you look back to moments in the last three years when european equities have fallen, a lot of it is being ascribed to issues with european politics and the integrity of the eurozone.

It is almost always coinciding with a slowdown elsewhere.

Last year, you had a slowdown in emerging markets.

European equities sold off.

They focused on the currency story.

They said because of emerging- market weakening, there is also a read across from one to the other.

The currency was kind of the stress point.

Is that something i was he replicated elsewhere?

I would be surprised if it wasn't given the global exposure.

Companies are always affected by currency volatility.

I don't think it affects the longer-term story.

You come back to the question of valuation.

On the cyclically adjusted basis, europe is one of the cheapest areas in the world.

Emerging markets have been what the story is with the fed.

What the story is, i don't know because we don't even know what data they are able to look at to make judgments on.

What is your assessment of what the fed's ultimate path is going to be?

I think the first thing it is important to recognize is that even a tapering does not mean momentary policy tightening.

The markets had taken it to mean implicit monetary policy tightening.

If you think about it, and we have hr coming out in our new quarterly addition, there is a picture that shows even if the fed tapers at various levels, the balance sheet is going to continue to grow.

They will continue to inject monetary stimulus into the system even if they aggressively taper.

I don't think they will do that.

The policy will be extremely accommodative.

That will continue to prop up risk assets.

It is just that when rates are so low for so long, some money is inevitably going to go to places it otherwise wouldn't have.

Emerging markets were a beneficiary of that.

As you start to plan for the future, some of that money goes back and that is where gm has taken a hit.

Stephen, the story surrounding europe is one of relative cheapness.

The telecom sector, we have been talking about m&a. everywhere from carlos slim to at&t. where is the epicenter of potential m&a action that potential investors should be looking at?

From our point of view, what we are trying to buy is companies with a strong franchise and attractive valuations.

The targets tend to be companies with a less strong franchise or a troubled balance sheet so they need someone to rescue them.

I think there are -- good quality stuff in europe.

In the periphery, a lot of the assets are cheap.

And he and the guys are saying that challenges remain but without challenges, there is no opportunity.

The opportunity is there.

You have about the volatility.

The markets have to look through that.

I think they will.

The sense in the market has not changed.

Three years ago, there was a global expectation that the centrifugal force of the market could rip the euro apart.

What they have learned in the last three years is that european nations are solidly behind this currency.

They will not allow that to happen.

I have to wrap it up there.

Vicki very much indeed.

-- thank you very much indeed.


Over to you.

Coming up, intel has plans to expand into smart grids.

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