Adapted from a 9/22/15 CNBC interview.
Q: Given the recent volatility across global markets, what are your biggest priorities for investment strategy and where are you finding value?
A: At the moment I think we are undergoing a bit of a reconsideration of a number of financial assets, but I think that the biggest priority for us these days is stability until we reach more attractive levels than we have right now.
When we see declines in the U.S. stock market, there tends to be a knee-jerk reaction that says that if we are down 10% or 12% from the highs, then that’s where the value is. While this is understandable, I think there is a better question to ask as we look around the world and find other markets down far more than U.S. equities. For example, emerging markets are down more than 20% over the past three months. Admittedly, the fundamentals there are threatened by a strong dollar, imminent Fed tightening and so forth. But I think the recent corrections in EM have restored a number of emerging market countries back to essentially 2009 levels. We are finding value in places like Taiwan and Korea that may have been punished too much for recent angst over China.
Q: So you're not worried about some great currency war especially in Asia that's going to bring down all those markets?
A: That is certainly not our central case, and these things are very fluid so we have to be alert. However, I do think it's important that that the Chinese have taken some action on the currency front because they had been dragged along with the dollar strength over the past 12 to 14 months. The message from China seems to be ‘enough is enough’ and this is an important one for global monetary dynamics.
Q: Companies like Verizon and AT&T are down about 5% this year even though they have nothing to do with China except for maybe buying some cheaper components from that country. So why do you think those types of names are being sold?
A: I think they get tarnished with some ideas that are macro in scope. These companies tend to be dividend payers and they're often linked to bond market vulnerability. But I think that all those things are inherently able to be statistically modeled, and in our view they have been punished well in excess of any vulnerability to interest rates or overall market weakness. So without a strong thesis for idiosyncratic problems at those companies, I continue to think there's some value there.
Q: Your year-end S&P 500 target is 2150, about 11% higher than where the index is right now. With three months to go in the year, how for far do we have to get before you say you are going to have to cut that target?
A: The theme behind that target is that there is a correction underway, but that it ought to resolve itself as it tends to do with seasonal strength toward the end of the year. However, we were thrown a little curveball given that the Fed did not do what we expected it to do, which was to deliver a small hike along with some reassuring language that no further action would be forthcoming for a while. That I think would be the central bank scenario most compatible with strength into year end. Now we may be under a cloud of uncertainty in what to expect from the central bank for the end of the year. So it may push off that kind of recovery, but thematically I think that unless we have a recession and a real profit contraction in the U.S., then we are likely to see enough repricing in the course of the next few weeks to establish an opportunity for a strong finish to the year.
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