Repeated central bank interventions are toying with investors’ emotions and account balances, says Danielle Park, president and portfolio manager at Venable Park Investment Counsel.
We’re with Danielle Park today and we’re talking about BRICS and PIIGS.
Danielle, what do you see as far as being a top down investment manager? When you’re looking out at the marketplace, with all of the news that’s going on and with everything that’s happening in Europe and in China—whether its exports or its imports are down, or whether they’re up—and the inflation in Argentina….
And you know, every bad piece of news gets blown out of proportion and nobody’s quite sure where things are, especially individual investors. They get lost in it all. So where do you sift through that, and where do you see the world at this point?
Well, it’s interesting, because I think that we get actually more coverage of the supposedly good news than we do of the bad news. It depends on the day, right?
But, for example, if you think back a couple of months ago to the late part of 2011: Equity markets had been falling for several months. Many of them had corrected more than 20%. People were becoming quite bearish at that point. Then you see that sort of goes to a negative sentiment, and all of the news stories tend to be negative.
Then there comes a great white hope, which is that central bankers around the world simply won’t let a bear market happen. I find that the conventional wisdom at this point is that, and it seems to be taking a new soldier down each day—anyone who was worried about things like high frequency trading or low volume or high falling off earnings, high valuations.
A lot of people have fundamental reasons to be suspicious or not very enamored of the present equity market, if you ask, in my opinion. But a lot of them have changed their stripes in the last little bit, on this idea that you’ve got all of this liquidity.
So you have to really balance that, because liquidity does strange things in the short run, which we saw in the last few years from the 2009 bottoms, from QE2 in the fall of 2010, and now in the last couple of months again, the European Central Bank and the facilities they’re putting in place.
But what I’ve noticed is that you get these periods of euphoria, followed by "Oh my goodness, it really didn’t fix anything. Oh my goodness, Greek people really can’t pay back their debt," and Portugal, and Italy, and it goes on and on.
So I think you have to really look at it from top down, more than from on the streets, because humans always have lots of unexpected things it seems. So the way that you gauge the impact of that or the relevancy of that, I think: first of all, you start with where are we within the overall climate?
The secular bear market started in 2000. Valuations have to work lower by the end of a 15- to 20-year period, and during that time, debt gets paid down and growth is weaker than people expect. Then you sort of get it all to a point where the excesses are worked out of the system, and the equity is built back up on balance sheets, and then you get into the next big boom period.
So, we’re not through this yet. Clearly, by the noise of the news and the fact that most countries now have more debt than ever before—we know the system has more debt today than it did 12 years ago—we’re not finished in the deleveraging process. So that means you have to look for cyclical opportunities within that trend, which is generally unrewarding over 15 to 20 years.
What you’re looking for are things that might give you some income yield or gain for a portion of that expansion, when people are euphoric about, perhaps, bailouts. Then when the reality hits, I think you need some way to take money off of the table again, because until we get to the end of this cycle, that will continue to be a very wild and volatile journey.
You really have to protect your capital, because you know that you’re not through it, and you know valuations are not as low as they are likely to be at the end. And you want to get income. Why? Because interest rates are these ridiculously low levels, and you know that’s an artificial condition in some ways.
You have to sort of just get through this period. And I say if you’re in the accumulation phase, you want to keep your risk really close to your chest. Not a lot.
Diversification doesn’t really work well in this environment, right, because you get all of the correlation in world markets. So I may love the idea of growth in China or the population in China, but if you look at a chart of the Chinese stock market in the last number of years, it’s in a profound downtrend right now, another cyclical downtrend. And it has been for the last many months…they tend to lead the rest of the world markets.
So you have to always be very realistic. The coupling really doesn’t happen in this kind of environment. Global capital flow moves sort of in concert. So that sort of all has to be taken into account in your allocation decisions.
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