Since bottoming at the end of October, the MSCI Emerging Market Index (MXEA) and MSCI Asia Ex-Japan ...
Spotting Glimmers of Recovery
04/02/2009 11:11 am EST
David Fuller, global strategist and writer for Fullermoney, sees opportunities in emerging markets and metals.
Q. David, we’ve recently had a great rally in global indexes. Will it continue, and why or why not?
A. I feel that it is a defining rally, with a number of Lowry’s Research’s important 90% up days (extreme upside volume and points gained—Editor), providing increasing evidence that the bear market mostly ended last November.
However, while Wall Street is the big elephant in the room, casting a large shadow in terms of influence, it is certainly not the leader. Fullermoney themes, led by Asian emerging markets and South American resources markets, definitely bottomed out in October and November. Many have also gone on to complete base formations.
In the short term, stock markets are technically overbought, so we can expect a pause and consolidation. However, if the Standard & Poor’s 500 index can hold on to approximately half of its gains from this month's lows, that would provide further evidence of recovery potential for the medium to longer term.
Q. You have said that corporate bonds are a leading indicator for stock markets. Please elaborate.
A. Stock markets will not perform while financial solvency is a major concern. Therefore, some confidence has to return to the corporate bond market before equities recover. BVD USD Composite (AAA) 10-year bond yields peaked dramatically in late October. BFV USD Composite (BBB) 10-Year yields look toppy, but briefly reached a new high in February, so they have yet to confirm the bullish lead of AAA [bonds].
Q. You seem bullish on Asian emerging markets, primarily due to their attractive valuations. You recently mentioned that countries you find interesting “do not have large deficits, but do have higher savings rates and stronger GDP.” Which markets in particular strike your fancy?
A. The combination of factors for Asian and resources emerging markets appeals to us. Moreover, they are interlinked, as China is the fastest growing user of many industrial resources. However, views vary considerably regarding sector, regional, and national performance potential. Case in point: The relative performance since last October of China and Brazil, among big country emerging markets, in comparison to the S&P 500 Index. We expect this upside leadership to continue.
Q. You recently mentioned that you believed “precious metals are still consolidating earlier gains, prior to additional strength.” Which ones do you like?
A. Gold and silver are consolidating earlier gains because the immediate appeal, we believe, is shifting away from fear and safe-haven status, back to a hard money hedge against fiat currencies. Incidentally, Fullermoney does not make recommendations, [but] personally, I hold gold, silver and platinum futures in my trading account. My personal investment account holds two gold shares and a gold share fund.
Q. What is your opinion on the stimulus plans currently proliferating around the globe? Are they too much, too soon; not enough, or just what the markets and world economies need to jump start the recovery?
A. These are great questions which no one can really answer, because we have not been in this precise situation before, particularly regarding the West's credit and insolvency crisis. [We] always assumed that for political reasons we would have a neo-Keynesian stimulus, rather than a tough-love Austrian school approach. Without a recipe book, policy is being decided by committee, and on the hoof, so I assume that it is replete with errors, compromises, pork, inefficiencies and injustices.
Nevertheless, I disagree with those who say stimulus plans don't work. The vast sums committed, including quantitative easing, will buy plenty of cushion for businesses and the unemployed, although it takes roughly nine to 18 months for most programs to kick in. The packages will also increase confidence, which is obviously a vital component in economic recovery. I think they will enable us to avoid a 1930s-style deflation, at a future inflationary cost.
Q. Which global currencies look attractive to you these days? And why?
A. Gold is the best unofficial currency, although it, too, fluctuates in price. I do not like the quantitative easing currencies. However in a leapfrogging race to the bottom, I prefer currencies which offer some interest for depositors and have fallen sufficiently to be medium-term recovery candidates. My cash is currently in New Zealand dollars and I think Asian Pacific currencies are generally oversold, as is the Brazilian real.
Q. Are there any particular sectors (or countries) that you would advise investors to stay away from at this point?
A: In terms of equities, we like countries with competitive valuations, relatively sound fiscal and monetary policies, superior GDP growth rates, and most of all—good economic governance. We say with a wee bit of hyperbole for emphasis: Governance is everything.
On sectors, one is spoiled for choice near the bottom of a market cycle. Nevertheless, I would still be wary of penny bank stocks, at least until the bankruptcies and quasi-nationalization issues have been resolved.
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