An Alpine Money Manager's Downhill Play

Is inflation dead? Maybe not forever, but to Swiss money manager Felix W. Zulauf, the battle against rising prices is as good as over for now.

After a "monumental" effort by major central banks to keep money tight for more than a decade, "we're finally in the opposite position from where we were in the 1970s," says Zulauf as he digs into a plate of venison and fried potatoes in Zurich's centuries-old Munsterhof restaurant. With economies slowing all over the place, "we're in a deflationary world," he says, "in a major way."

No wonder Zulauf loves bonds. He figures that today's high interest rates, rising taxes, and continuing currency turmoil will push Europe into a "severe recession" by next year. "The economy is going from bad to worse," says the onetime banker turned fund manager to well-heeled global investors.

But the slowdown will send European rates sharply lower over the coming year. Zulauf estimates that short-term yields could fall by half in Germany, to 2% or so, while those in France could drop by an even greater degree. Long-term rates, he thinks, will go below their lows of 1993, when German government bonds, now yielding 6.1%, were at 5.5%.

Indeed, Zulauf, who runs his eponymous money-management firm from the lakeside city of Zug, some 20 kilometers south of Zurich, sees the biggest bond payoff coming from the Continent. To be sure, Japan's economy remains sluggish, and rates on U.S. Treasuries are near two-year lows as the economy cools. But "there's much more left in Europe," he says. So Zulauf counsels investors to sink half of their portfolios into Europe's core bond markets: Germany and France. "This environment is not very bullish for stocks," he says. "But it's very bullish for bonds."

That said, Zulauf is not abandoning stocks altogether. He figures the dollar will climb steeply in 1996 and argues this will be especially good news for European companies with big operations in the U.S., including French insurer Axa and British food and beverage giant Cadbury Schweppes PLC.

He's also high on gold bullion and mining stocks, even in the face of a slowing global economy. If the world's central banks start pumping out money in a big way, Zulauf argues, growth will eventually pick up and commodity prices will gain. For that reason, he thinks investors should consider moving into such mining names as International Nickel, Asarco, Phelps Dodge, and RTZ. Beaten-down South African gold issues also may merit a look, especially if bullion, currently trading at around $390 an ounce, pushes past $410. From there, gold could well make "a quick move to $500," he says.

Perhaps if that happens, Zulauf might temper his optimism on inflation or appetite for bonds. But don't look for a change anytime soon. From his European vantage, right now, "everything is pointing down," Zulauf says. Those are words to make a bond bull smile.

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