Q&A: The World Looks a Lot Brighter
If anyone has the inside scoop on global markets, perhaps it's Avinash Persaud. The 36-year-old global head of research at State Street Global Markets gains a great deal of insight from watching the ebb and flow of money through State Street, which is the custodian for about 12%, or $6 trillion worth, of the world's securities. Based in London, Persaud studies and writes reports about the flow of these assets around the world. He is also a key investment adviser for the $770 billion that State Street manages for institutional investors. Personal Finance Editor Lewis Braham spoke with Persaud recently on the phone.
Q: How do you account for the slide in foreign markets this year?
A: There are three reasons. One is that foreign equity markets tend to be dominated by large export-driven companies that depend heavily on sales to the U.S. This link with exporters has caused the economic problems in the U.S. to be transmitted quickly overseas. Two, European markets have a high weighting in telecom stocks--even higher than the U.S. market--and these stocks have taken it on the chin of late. Exacerbating these two problems are big European institutional investors that have strict risk-control parameters on their portfolios, which force them to sell stocks that go down. That made the sell-off even more severe.
Q: If big foreign companies are mainly exporters, is that a reason to buy shares of smaller companies, which are more connected to the local economy?
A: To diversify abroad, you need companies that are truly different in where they get their earnings from and where they take their risks. Buying small companies is one way, but buying larger companies in sectors that are driven by the local economy--such as utilities, real estate, and transportation--is another.
Q: Where are you finding investment opportunities overseas right now?
A: Britain, Sweden, Singapore, Japan, Switzerland, and Germany are the better places to put your money, and we would overweight those markets and underweight the U.S. These countries have lower stock valuations than the U.S. and interest rates that are likely to decline--which causes stocks to rise.
Q: How important is it to diversify across different countries' markets?
A: That's an interesting question. Historically, we have tended to weight our portfolios more by sectors than specific countries. But I think, going forward, people need to diversify across markets as well. If corporate governance is going to be important, then the differences between countries' governance standards is important.
Q: What sectors are attractive now?
A: We believe there will be a global economic recovery, so we like cyclical sectors: basic materials and industrials. We also like consumer discretionaries such as autos, which benefit from lower interest rates. Some stocks in the semiconductor industry are now good values, although we are not overweighted in technology as a whole.
Q: What's your take on emerging markets?
A: Over the course of the next 12 months, investors should be building positions in emerging markets because there's going to be a global recovery. It's going to come because interest rates are very low and there's going to be a weak dollar. And those three things are particularly good for emerging markets.
Q: Many analysts still think the U.S. dollar is overvalued. How far will it have to fall to reach a fair value?
A: I think it will fall another 20% over the next 6 to 12 months. A weaker dollar is in fact good for every country, which is why it will happen. U.S. policymakers won't intervene if it's good for everybody. It's good for the U.S. because it will reduce its giant current account deficit and it will help to boost exports. It will help to shift the burden of growth from the government to the export sector. In Europe's case, it will help to place a lid on inflation. And because the European Central Bank is inflation-focused, it will allow them to cut interest rates.
Q: At the start of the year, the valuation gap on a price-to-earnings basis between the U.S. and foreign markets was the widest it had been in 30 years. Is that still so?
A: Foreign markets are still cheaper, but the valuation gap has narrowed partially because European earnings have come down. But I would say that investors are paying less attention to that narrowing because they're worried more about the quality of the numbers. Two years ago, if you asked investors which markets were you most confident about in terms of the quality of the earnings, the reliability, the transparency, the certainty of the earnings, they would have put America No. 1. Today, recent polls put Britain and euro-land above the U.S.
Q: What countries are you investing in now?
A: We quite like Eastern Europe because of its low valuations and declining interest rates. Many of these countries--Poland, the Czech Republic, Hungary--will be joining the European Monetary Union soon, and that will also benefit them. When countries such as Italy and Spain joined the EMU years ago, they lowered their interest rates to match the rest of euro-land, which was good for their equity markets. The same will happen with Eastern Europe.
Q: What about Japan?
A: It has outperformed most other global markets this year. One of my analysts recently completed a study that shocked me. It showed that Japan in fact is one of the most globally cyclical of all markets, that when the global economy's recovering, the Nikkei is the best-performing market. So I think that it's also a play on the recovery.
By Lewis Braham