Online Extra: Central Europe "Will Be Huge"
Rudolph-Riad Younes' views on Wall Street are about as unconventional as they come. Based on his most recent analysis, the manager of Julius Baer International Equity Fund (BJBIX ) has concluded that the U.S. stock market and economy will continue to drop sharply, while Central Europe's -- Poland, Hungary, and the Czech Republic -- are going to surge.
Younes has proven himself adept at avoiding pitfalls and spotting opportunities around the globe. He views investing through both a telescope and a microscope. He studies a country's entire economy, then probes the nitty-gritty details of its stocks. This style has produced exceptional results: His 9.7% five-year average return beats 98% of foreign-stock mutual funds.
Standard & Poor's, in partnership with BusinessWeek magazine (sister companies under the McGraw-Hill corporate umbrella), recently picked Younes as 1 of 10 mutual-fund managers to receive the first annual Excellence in Fund Management awards. Recently, BusinessWeek Personal Finance Editor Lewis Braham caught up with Younes in his New York office. Following are edited excerpts of their conversation:
Q: What's wrong with U.S. stocks right now?
A: You have this Wall Street spin. Brokers are telling investors that these last two years of the bear market are like those in 1974 or 1975, or they say today's market is like 1991's because we are again ahead of an Iraqi war. The reason they say this is because after those two periods, you had a very nice run in the equity markets.
But the similarities with those periods are superficial. Valuations on U.S. stocks are about 35% higher now than they were in 1991. We also have too much unpaid debt in this country. As a result, we have a quadruple whammy in the making -- a consumer balance-sheet problem, a corporate balance-sheet problem, a state balance-sheet problem, and not far from today, a federal balance-sheet problem.
Q: How else do you differ from the consensus?
A: Everybody thinks China's entry into the World Trade Organization is good for Asia and for the global economy. We think China is a disruptive force. It's very positive for the consumer in terms of lower inflation, but it's bad for almost everybody else. It's going to be negative for manufacturing jobs and industries across the globe because of China's lower labor costs. And since the average blue-collar worker in China makes 30 cents an hour, they're not going to be buying a lot of American or European goods.
Q: Where are you investing right now?
A: Central Europe, we think, it's a quantum leap, a once-in-a-lifetime opportunity. This region, which includes Poland, Hungary, and the Czech Republic, will become part of a First World economy when it joins the European Union [in 2004]. They're going to have the Euro as their currency. And they're going to have a very low interest rates, which stimulates economic growth. And they're going to have billions of dollars in aid from the EU. The returns for this region will be huge over the next few years.
Q: What's so great about the region having the Euro for its currency?
A: Currency has always been a big problem in emerging markets such as Argentina and Russia. The governments of developing nations almost always borrow in dollars or other foreign currencies. So whenever they have a currency devaluation, their debt, which is denominated in dollars, grows enormous, and the country and the companies in it go bankrupt. But once Poland, Hungary, and the Czech Republic join the EU, they're not going to have to worry about their currency anymore. They'll have the Euro.
Q: What's your investment strategy for developed nations?
A: With emerging markets, the economic health of the country you're investing is extremely important because of the currency issue I just mentioned. With developed nations, which have more stable economies, we focus more on sectors and individual stocks. The more global the sector is, the more you think about it as a whole because what happens to a computer manufacturer in California affects manufacturers in Germany and France.
Q: What sector do you like now?
A: We like natural-gas companies, particularly in Canada. It's a supply-demand story. Demand is increasing because gas is a clean and efficient energy source. Also, tension in the Middle East is driving consumers and businesses to use alternatives to oil. Now, the supply side: Gas production has declined dramatically in recent years. Also, it's a commodity that's very difficult to transport. You can't ship it from China or from Russia if you don't have enough gas here. You need pipelines.
Q: Which gas companies do you own?
A: We look for companies where the percentage of gas produced is higher than the percentage of oil, because there are very few pure gas companies. Of those in Canada, we own EnCana (ECA ) and Canadian Natural Resources (CED ). Both are cheap stocks and have good management teams.