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17-05-2014, 02:36 PM
US 'doing better than people think'
Vesna Poljak
1073 words
14 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
The chief executive of one of the world's biggest fund managers believes company profits in the United States will keep growing faster than the world's biggest economy as the benefits of cheaper energy costs, productivity gains and the housing recovery come through.
Jim McCaughan from Principal Global Investors, which oversees more than $US300 billion ($320 billion) in assets, said that "data hawks" who look at the aggregate economy are missing the fact that the private sector is doing well.
"I was at a client meeting a few weeks ago and there was a guy from North Carolina saying, 'Sure, Chinese labour is cheaper than ours, but we've got cheaper energy and productivity'," the New York-based investor said on a visit to Melbourne on Tuesday.
"Corporate profits in the US will continue to grow faster than the economy, and I point to continuing productivity, relatively cheap energy and the sustainability of the housing market. It's really those three factors which mean that the US private sector economy is doing better than most people think."
Mr McCaughan described the price advantage achieved from the US energy boom as "pretty extreme".
"This is underestimated by many commentators. It's not just a bit cheaper," he explained, citing a market price of as low as $US4.50 for a unit of natural gas, which would cost $US16 sourced from Qatar or Russia.
For investors, who have witnessed the S&P 500 barely move in 2014, he advocates staying "up to weight" US equities. Indeed, if it were not for the geopolitical risk sparked by military action in Ukraine, he thinks the S&P 500 would probably be 5 per cent higher by now.Impact of cold weather
Economists were surprised by the extent of the impact of unseasonably cold weather on the US economy, which was still evident in first-quarter company earnings manifested in different ways.
"If you look for example at the Ford results that came out, they had a significant extra charge for transport because of the adverse weather conditions," Mr McCaughan said. "It shows that the impact of the bad winter was a lot more widespread and was a lot more than slowing down construction."
US growth will be around 3 per cent in 2014, he believes, and further improvements in payrolls will emerge.
Principal does not see 10-year Treasury yields – the benchmark for the cost of borrowing in the US – spiking as the unwinding of the Federal Reserve's stimulatory policy runs its course.
This is a persistent concern for some bond experts.
"I'm not one of those people who expect disruption amid the unwind of QE," Mr McCaughan said. "I don't think they're going to be actively selling [assets purchased under QE]. However, I think what they're going to do is let the bonds mature and run it down slowly that way."
He does not expect a quick rise in the 10-year yield, because this would pose an enormous concern for the Fed for its ramifications for the housing market. "A 10-year yield at 2.5 [per cent] means that a 30-year mortgage is 4 [per cent] in change. But if you got to a 4 per cent yield . . . that will hurt."
Another factor working in favour of US equities is that protracted and painful market downturns tend to be followed by longer recoveries.Alibaba IPO
Capital markets in the US are booming, which has paved the way for the biggest initial public offering yet – the float of Chinese e-commerce group Alibaba.
Mr McCaughan said the move to take Alibaba public in the US, and not pursue a Chinese listing, suggested the fact that China still had a long way to go to match the US for depth in capital markets. Indeed, he did not think that last week's moves by China's state council, pledging everything from increased foreign investment in Chinese companies to local government bond issuance, would be enough to offset the macro themes that dominate the investment case for Chinese equities, which have underperformed in 2014.
"For Chinese equities there's a lot of other things. There's the very short-term volatile nature of the market . . . The path China's on is clearly towards liberalisation but it's going to be very slow," he said.
"Mostly what people want China for is the domestic growth and it's the domestic economy that's slowing down – that will be a different incentive," attracting value investors potentially. "There's not many multinationals based in China, look at Alibaba – the plan to list in the US is very interesting."
There was no escaping that China is still an emerging market and that brings with it characteristics of volatility too, he added.
"To me it's too early to really go wholeheartedly into emerging markets. The thing I would point to also in China is [in] the last two years the economy has been kept going by very fast credit expansion – that's about to run its course."
Brazil is equally vulnerable to a slowing of credit growth, he believes, and "they're arguably having a harder landing than China". But with a long-term view, he thinks this is a good time to accumulate emerging markets exposure. Mr McCaughan has worked on the buy side since the 1970s and found himself in the headlines four years ago when he commented that high-frequency trading was akin to "structured front-running".
He is encouraged that high-frequency trading is again in the spotlight, thanks to the publication of Michael Lewis's Flash Boys, which has divided opinion on the case for high-frequency activity. Lewis himself takes a dim view of the practice.
Mr McCaughan notes: "I think the narrative in Michael Lewis's book is about 80 per cent accurate. I totally disagree with some of his conclusions however . . . what the front running does is make the market more clunky and expensive to use than it should be, but I don't think it's rigged," he said.
And even though Boomerang is his favourite of Lewis's popular books on financial markets, "Flash Boys will be a pretty good movie too, in due course".READ NEXT: US government on track to slash deficit US bonds advance as Yellen stays dovish
Fairfax Media Management Pty Limited
Document AFNR000020140513ea5e00040
Vesna Poljak
1073 words
14 May 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
The chief executive of one of the world's biggest fund managers believes company profits in the United States will keep growing faster than the world's biggest economy as the benefits of cheaper energy costs, productivity gains and the housing recovery come through.
Jim McCaughan from Principal Global Investors, which oversees more than $US300 billion ($320 billion) in assets, said that "data hawks" who look at the aggregate economy are missing the fact that the private sector is doing well.
"I was at a client meeting a few weeks ago and there was a guy from North Carolina saying, 'Sure, Chinese labour is cheaper than ours, but we've got cheaper energy and productivity'," the New York-based investor said on a visit to Melbourne on Tuesday.
"Corporate profits in the US will continue to grow faster than the economy, and I point to continuing productivity, relatively cheap energy and the sustainability of the housing market. It's really those three factors which mean that the US private sector economy is doing better than most people think."
Mr McCaughan described the price advantage achieved from the US energy boom as "pretty extreme".
"This is underestimated by many commentators. It's not just a bit cheaper," he explained, citing a market price of as low as $US4.50 for a unit of natural gas, which would cost $US16 sourced from Qatar or Russia.
For investors, who have witnessed the S&P 500 barely move in 2014, he advocates staying "up to weight" US equities. Indeed, if it were not for the geopolitical risk sparked by military action in Ukraine, he thinks the S&P 500 would probably be 5 per cent higher by now.Impact of cold weather
Economists were surprised by the extent of the impact of unseasonably cold weather on the US economy, which was still evident in first-quarter company earnings manifested in different ways.
"If you look for example at the Ford results that came out, they had a significant extra charge for transport because of the adverse weather conditions," Mr McCaughan said. "It shows that the impact of the bad winter was a lot more widespread and was a lot more than slowing down construction."
US growth will be around 3 per cent in 2014, he believes, and further improvements in payrolls will emerge.
Principal does not see 10-year Treasury yields – the benchmark for the cost of borrowing in the US – spiking as the unwinding of the Federal Reserve's stimulatory policy runs its course.
This is a persistent concern for some bond experts.
"I'm not one of those people who expect disruption amid the unwind of QE," Mr McCaughan said. "I don't think they're going to be actively selling [assets purchased under QE]. However, I think what they're going to do is let the bonds mature and run it down slowly that way."
He does not expect a quick rise in the 10-year yield, because this would pose an enormous concern for the Fed for its ramifications for the housing market. "A 10-year yield at 2.5 [per cent] means that a 30-year mortgage is 4 [per cent] in change. But if you got to a 4 per cent yield . . . that will hurt."
Another factor working in favour of US equities is that protracted and painful market downturns tend to be followed by longer recoveries.Alibaba IPO
Capital markets in the US are booming, which has paved the way for the biggest initial public offering yet – the float of Chinese e-commerce group Alibaba.
Mr McCaughan said the move to take Alibaba public in the US, and not pursue a Chinese listing, suggested the fact that China still had a long way to go to match the US for depth in capital markets. Indeed, he did not think that last week's moves by China's state council, pledging everything from increased foreign investment in Chinese companies to local government bond issuance, would be enough to offset the macro themes that dominate the investment case for Chinese equities, which have underperformed in 2014.
"For Chinese equities there's a lot of other things. There's the very short-term volatile nature of the market . . . The path China's on is clearly towards liberalisation but it's going to be very slow," he said.
"Mostly what people want China for is the domestic growth and it's the domestic economy that's slowing down – that will be a different incentive," attracting value investors potentially. "There's not many multinationals based in China, look at Alibaba – the plan to list in the US is very interesting."
There was no escaping that China is still an emerging market and that brings with it characteristics of volatility too, he added.
"To me it's too early to really go wholeheartedly into emerging markets. The thing I would point to also in China is [in] the last two years the economy has been kept going by very fast credit expansion – that's about to run its course."
Brazil is equally vulnerable to a slowing of credit growth, he believes, and "they're arguably having a harder landing than China". But with a long-term view, he thinks this is a good time to accumulate emerging markets exposure. Mr McCaughan has worked on the buy side since the 1970s and found himself in the headlines four years ago when he commented that high-frequency trading was akin to "structured front-running".
He is encouraged that high-frequency trading is again in the spotlight, thanks to the publication of Michael Lewis's Flash Boys, which has divided opinion on the case for high-frequency activity. Lewis himself takes a dim view of the practice.
Mr McCaughan notes: "I think the narrative in Michael Lewis's book is about 80 per cent accurate. I totally disagree with some of his conclusions however . . . what the front running does is make the market more clunky and expensive to use than it should be, but I don't think it's rigged," he said.
And even though Boomerang is his favourite of Lewis's popular books on financial markets, "Flash Boys will be a pretty good movie too, in due course".READ NEXT: US government on track to slash deficit US bonds advance as Yellen stays dovish
Fairfax Media Management Pty Limited
Document AFNR000020140513ea5e00040