Transcript: Ed Hyman & Dennis Stattman – Part Two – 1-18-13 #930
WEALTHTRACK Transcript
#930- 1/18/13
CONSUELO MACK: This week on WEALTHTRACK: investment game changers in part two of our exclusive interview with Ed Hyman, Wall Street’s long time number one economist and Blackrock’s Great Investor Dennis Stattman- they identify what could be the three biggest plays of 2013. Next on Consuelo Mack WEALTHTRACK.
Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. This week we are bringing you part two of our exclusive annual interview with Wall Street’s reigning king of economists, ISI Group’s Ed Hyman, who is joined by Blackrock’s reigning lord of global allocation, Dennis Stattman. Ed Hyman is the co-founder and chairman of independent institutional research firm, ISI Group and has been rated the street’s number one economist for an unprecedented 33 years in a row. Dennis Stattman has been running Blackrock’s Global Allocation Fund since its founding in 1989. The broadly diversified $50 billion plus fund which invests in stocks, bonds and other securities around the world has delivered equity like returns with much less than stock market volatility since inception.
Last week we discussed how much better the markets performed last year than it actually felt because of the series of rolling crises we went through from Europe’s financial woes to China’s slowdown to the year-end fiscal cliff in the U.S. Neither Hyman nor Stattman expect the crisis atmosphere to end any time soon. We have the debt ceiling, automatic spending cuts and budget negotiations to deal with this quarter alone in Washington. But they are both tracking some very positive developments that helped the markets strengthen last year and are continuing to provide support this year: massive global easing, the housing recovery in the U.S., and China’s economic rebound. This week we discuss what they believe are investment game changers for this year.
I began the interview by asking about Europe’s economy which Ed Hyman had described as a nightmare on WEALTHTRACK a year ago, a reason he missed the strong stock market rebound.
ED HYMAN: Well, first, I would describe my view a year ago as being too bearish. But the economy in the past year has been about like what I expected, which is really awful.
CONSUELO MACK: Awful in Europe.
ED HYMAN: The unemployment rates have gone up almost in a stunning amount. The youth unemployment, a disturbing amount. The youth unemployment in Spain is up to 56%.
CONSUELO MACK: Awful.
ED HYMAN: It’s just incredible. And no particular let up. But I mentioned earlier about the role policy plays, and they lit it up. And the markets, I remember you talked about the German market was up almost 30%, the German stock market. And yields have come down dramatically. And the bank stocks have rallied dramatically.
CONSUELO MACK: Yeah, the bank stocks have been amazing, right.
ED HYMAN: So it just… it’s a lesson about two things. One is the power of policy. And the second is a reminder of the… oftentimes, the standing against the crowd works out. A year ago, I mean, to think that the DAX would go up 30%, you had to go pretty far to find somebody that was… I guess was the best developed …
CONSUELO MACK: Or Greece up 30 plus percent.
ED HYMAN: Yeah. Anyway. So the markets have done a lot better. I don’t have a strong feeling about Europe. I think it’s going to continue to be a problem on the economic side. And if we get through the next, what, five months, and if we get to that point of sell in May, and there is a problem, it’ll be that… one of the problems, potentially, is that Europe has an economic relapse, you know, the economies relapse.
CONSUELO MACK: Right.
ED HYMAN: But the markets have been spectacular, and markets tend to lead. So I’m watching that. I look forward to hearing what Dennis has to say about this.
CONSUELO MACK: Right. No, as do I. It’s interesting. I know that Ed’s clients, one of the questions they’ve been asking you all a lot is, you know, whether there’s going to be kind of re-emergence of a European crisis again. And so how concerned are you about the economy in Europe, and what’s your take on Europe?
DENNIS STATTMAN: Well, Europe is probably the region of the world that’s weakest, economically. And I think it will continue to be that for most of 2013, perhaps the entire year. What’s changed in Europe seems to be the implication of weakness. If we went back 14 months ago, people were very concerned about the stability of the European banking system. And worst case scenarios involved the possibility of a rolling set of very significant bank failures. And that possibility was really taken off the table in November of 2011 by the ECB. And the ECB stepped up, again, in July of this year, really to backstop the government bond markets. And so…
CONSUELO MACK: Was that when Mario Draghi basically said we’ll do what it takes?
DENNIS STATTMAN: Yes. And so …
ED HYMAN: Incredibly powerful words there.
CONSUELO MACK: Yes.
DENNIS STATTMAN: Yeah. And when you have a central banker take that position, having not taken it before, that’s a critically important change. Unfortunately, central banks can’t simply flip the on switch for economies. So what they can do is provide liquidity to the banking system. They can be a lender of last resort. They can take that bank failure risk and contain it. But they can’t give the youths in Spain a job. And so we’re sort of half way. We’ve taken the worst case possibilities off the table. But we haven’t solved the underlying problem of a dispersion of competitiveness across the European economies; that is sort of straight jacketed by having one monetary policy and one currency for a number of disparate economies. So stocks and economies aren’t necessarily bound to go in the same direction. And I think the last 15 months in the European stock market is a great illustration of that.
CONSUELO MACK: So as an investor, with the BlackRock Global Allocation Fund, what are you doing in Europe?
DENNIS STATTMAN: We have some European exposure, but we have not been particularly aggressive there. We’ve tried to be selective. In times of weakness, we’ve bought some of the better quality European banks. We thought Germany was the best positioned market, and the DAX got very cheap during 2011, and we added a significant portion to our European equity exposure in Germany. We like the European oils, as I’ve mentioned on another show.
CONSUELO MACK: Right, last week, right- One Investment was Total, a French oil company. Right.
DENNIS STATTMAN: Where you get value growth and yield. So there are some individual investments in Europe that make a lot of sense on a price basis. But we’re not convinced that overall the European stock markets, after these big rallies, represent a great opportunity.
CONSUELO MACK: So let’s move to another part of the globe, and I know that both of you are focused on, and that is China. What is the situation with the Chinese economy, you know, the fears of a real slowdown, Ed, seem to be behind us. How important is China going to be to global growth in 2013?
ED HYMAN: Well, I’d say yes to all of those. First, it’s probably three months ago that hard landing was like the overwhelming mantra for China’s economy. And it was everywhere you would go. I remember I was in Stockholm, and because they have a lot of international companies there, they were just pounding the problems. And we have a great China research team, and they were getting more and more bearish on China. And, now, they’ve turned bullish. And the stock market has started to come back. And everything I hear from everybody that is a true expert on China that, you know, feet on the ground or having visit, or company contacts, is that China has definitely turned the corner. One of the things that happened was that inflation went from six to two percent. And that doesn’t seem like a particularly important economic development in the general sense, but boy, it really changes the dynamic for spending. When you’re taking six percent of income and now you’re only taking two, you get a real increase in real income. And then you had the transition, and before the transition, business really slowed down because of the uncertainty about who the new…
CONSUELO MACK: Right. And this is the new congress, the new party leaders that have taken over, right, in China.
ED HYMAN: Right. This occurred, what, a couple of months ago. And so that contributed to it. And then you had a sort of global inventory swing, which seems to have reversed. In any event, everything I see, looks like China has turned the corner. And that is a huge difference for the world economy. When it was going down, I think it was one of the dominant forces, along with Europe, that made for the global growth problem in 2012. And now it looks like it really has turned back up. And the data, the past two or three months, has just been one positive number after another. Exports today, a surprising… by factor of like two or three, have been the latest example.
CONSUELO MACK: Yes. Dennis, China, you think it’s really important as well to global growth.
DENNIS STATTMAN: Absolutely. It’s the big swing factor. And I agree with Ed, it’s simply a more positive outlook today. And if we look back 18 months ago, China was encountering an inflation problem. They did some policy tightening to try and deal with that. And they damped down inflation successfully. I think we’ve been through the effects of that tightening cycle. We’re coming out. We think the property market is improving. We think the consumer economy is strong there. And that China is moving from a concern to a support for growth. It’s very positive.
CONSUELO MACK: So how do we take advantage of that as investors? How are you taking advantage of the reemergence of China’s economy as an incremental addition to the global economy?
DENNIS STATTMAN: Companies that sell into China are really going to benefit from this. And we believe that a country that’s very well positioned today in terms of valuation for the stock market, and policy changes, where psychology amongst investors has been very negative, and is in the process of changing to more positive, is Japan. We’re very positive on the Japanese stock market.
CONSUELO MACK: Oh, so that’s interesting. So Japan is the China play.
DENNIS STATTMAN: We think so.
CONSUELO MACK: So let’s move on to Japan, because I know both of you have been following what’s going on in Japan. We have a new prime minister and he’s come on like gangbusters and he said, we’re going to have inflation in Japan after 20 years of no inflation. And they’ve targeted something like two percent. So tell us about the outlook for Japan, Ed, and that can be the big surprise in 2013, right?
ED HYMAN: Yes. Well, I’ve been burned so many times on Japan. I have no fingers left to really touch this one. But I’m watching it. I was in Japan, in Tokyo, when the Abe emergence occurred, which was almost overnight.
CONSUELO MACK: Shinzo Abe, right.
ED HYMAN: And the new prime minister. And it was a landslide victory, which was not… it was certain he was going to win, but it wasn’t certain by what margin. It was a landslide victor. And so this is a pretty good chance for Japan to shine. The markets have responded very strongly. The Yen, which they’re focused on, has weakened significantly, which is what they want.
CONSUELO MACK: Right. Versus the dollar.
ED HYMAN: I guess versus all currencies.
CONSUELO MACK: All currencies, right. The Euro as well and …
ED HYMAN: And, as intended, and …
CONSUELO MACK: Right. To make their products more competitive. Right.
ED HYMAN: Right. And they will have a new head of the central bank in a few months. And that new head will be much more dovish than Shirakawa, the current head has been…
CONSUELO MACK: Meaning that he’ll want to ease more. He won’t be afraid of inflation. He’ll …
ED HYMAN: Right. And if I could go back to earlier thoughts, you know, this is an environment where there have been 300 easing moves around the world. So now Japan is joining something, not an outlier. And the bank stocks, for example, in just a few weeks have rallied 30%. You know, banks stocks are an important sort of lead horse in economic futures. So you have Japan doing better. You have China doing better. You have housing doing better in the United States. And Europe, I guess, is maybe the tail on the downside has been cut off. So that’s a pretty interesting package.
CONSUELO MACK: Definitely is. So Japan, talk to us about the investment opportunities in Japan. And you are overweighting Japan in the Global Allocation Fund.
DENNIS STATTMAN: Very much so. One might think of Japan as the land of false dawns. And indeed, there have been ever so many of them in the past 23 years. It’s really been a 23 year bear market in Japanese stocks- from, albeit, an extremely high starting point. And it’s lead to an enormous amount of skepticism. So many people have been wrong so many times about Japan, that they have come to believe they’re going to be wrong again. We think that in fact it’s very possible that we’re seeing a title change in the economic situation in Japan with respect to the stock market.
Ed referred to the election. The election was a landslide in favor of Shinzo Abe and the LDP. And they very much ran on a platform of reflation, getting out of deflation, getting into inflation, and weakening the Yen. Japan really has not moved to weaken the Yen before this, and we think that is going to be a very powerful stimulant to the Japanese economy, to Japanese corporate profits, and to the Japanese stock market. There are an enormous number of skeptics about the Japanese stock market, and there is a ton of money on the sidelines that could come into Japanese stocks.
CONSUELO MACK: From overseas or …
DENNIS STATTMAN: From overseas, from Japanese individuals, from pension funds, from government pension funds, from corporate pension funds. If you look at their exposure to Japanese equities, on average, the government pension funds and the corporate pension funds have less than 20% of their assets exposed to the Japanese stock market; in fact, between 12 and 16%. If you compare that to other countries, it’s really miniscule. People don’t understand how powerful money coming in to the Japanese stock market can be. They don’t understand how illiquid it has become. Japan is the world’s third largest economy and second biggest stock market. But we took a look at the illiquidity in Japanese stocks. Unbelievably, the 100 largest stocks in Japan in terms of trading volume taken together average less volume in one day than Apple computer.
CONSUELO MACK: The top 100…
DENNIS STATTMAN: The top 100. So when money comes in to the Japanese stock market, it has the potential to move it a great deal. So we’re very bullish on the Japanese stock market. We’re bearish on the Yen. And we’re bearish on the Japanese bond market.
CONSUELO MACK: I have to ask this… Apple, because Apple is a position in the BlackRock Global Allocation Fund. I mean, I know you have 700 securities, you’re widely diversified, but Apple was a big one for you. I think it was like around two percent or something. What’s your take on Apple?
DENNIS STATTMAN: We have much less Apple than we used to, yes. And look, it’s a great company. But it’s also a great company with very high profit margins and an awful lot of competition. And we think that’s its vulnerability right there, price and profit margin.
CONSUELO MACK: All right. So another potential game changer that you two believe could happen as well, and I mean, Japan is one of them and that’s a real contrarian view, is about energy independence in the U.S. and in North America. And that’s starting to get much more press now. Talk to us about the energy independence possibilities and what that could mean to the economy, Ed, in the U.S. and in Canada.
ED HYMAN: Well, first I would share with you and your viewers, and Dennis, that when I travel around, and this topic comes up, and you talk to somebody that is knowledgeable about it, like I did this morning, people get visibly excited. I mean, they’re… I can tell you’re excited about Japan. But people really get excited. So first, this morning, one of the big news stories was that U.S. oil product hit a 20 year high in the first week of the year. So somebody’s looking pretty hard to find that statistic. But it was all over the news. And it follows earlier in the week that oil imports hit a 24 year low. So obviously we’re producing and therefore we’re not… and so…
CONSUELO MACK: And that’s the direction we want to see, right.
ED HYMAN: And it looks as though, so this is a very exciting thing. And it comes out of the new technology of unleashing oil from rocks, the so-called fracking, and what I’ve just covered does not touch on natural gas, which is, what, a fifth the price of oil. And it’s enormously exciting because it makes U.S. manufacturers so much more competitive, like chemical companies and whatever. So in short, this is potentially a real game changer.
The danger for people like Dennis and myself is to get too excited. But I think you and I are both honest brokers about what’s happening. I told you a year ago, I thought Europe was a nightmare. There are a lot of things like China or like Japan, or like U.S. energy independence that are really very, very powerful positives. And there are occurring in an environment that has maximum stimulus and zero interest rates, and investors generally cautious. So it’s not as though people are just saying oh, yeah, this is great, give me more. This is, you know, gee, I’m not sure all this is going to come together.
CONSUELO MACK: Right. Show me.
ED HYMAN: I’m worried about the deficit, or monetary policy or things I mentioned earlier.
CONSUELO MACK: So energy independence is a potential game changer. Or is it already a game changer in the U.S.?
ED HYMAN: It’s probably becoming a game changer.
CONSUELO MACK: Becoming.
ED HYMAN: It’s slower. You know, Dennis, I think, was right on in pointing out the extent to which an increase in house prices influences a large part of the economy. And in particular, I think it encourages consumer spending and employment. And then you have the energy boom. And there are other factors in the United States that are unusually good, like potential manufacturing renaissance, which has a… people relate to, and the tech sector is pretty vibrant.
CONSUELO MACK: I’m feeling much better talking to you two than I did coming into this. But we’ve got one minute left, and I’ve got to get to the final One Investment for a long term diversified portfolio. So Dennis, do you have another one for this week, part two?
DENNIS STATTMAN: Sure. Japanese stocks. You could buy the Wisdom Tree, a hedged Japanese equity fund, symbol DXJ, which gives you exposure to Japanese stocks with the currency hedged.
CONSUELO MACK: And Ed, do you have a second for us for in part two?
ED HYMAN: Well, I would go to move along with Dennis. I think I would pick the Shanghai Composite. It’s… what, 10,000. It’s really down. It’s been the worst stock market in the world. It’s now up about 15, 20%. But I think that might be a good play for 2013.
CONSUELO MACK: And is there a way to play that? Is there an ETF you’d recommend?
ED HYMAN: ETFs would be the best play.
CONSUELO MACK: ETFs. All right. Well, we’re going to leave it there. What a treat to have the two of you to launch 2013 with us on Wealth Track. And I look forward to having you both back next year at this time for our 2014 outlook at well. So Ed Hyman, so great to see you from ISI Group, and thank you for being exclusive on Wealth Track for television. We love having you. And Dennis Stattman, it is always a treat to have you as well, from BlackRock.
DENNIS STATTMAN: Great to be here.
CONSUELO MACK: So thank you both very much.
Have you ever wondered how young our guests were when they got interested investing? In our WEALTHTRACK Extra feature, we ask both Ed and Dennis that question. You’ll find the answers on our website, wealthtrack.com.
At the conclusion of every WEALTHTRACK, we give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point picks up on something Ed Hyman said earlier that “often times standing against the crowd works out.” He was referring to how well European stock markets performed last year despite the terrible shape their economies were in. So this week’s Action Point is: sometimes stand against the crowd.
Dennis Stattman is doing so by investing in some Japanese companies, a grave yard for many investors over the past twenty years. Ed is doing so by moving back into the Chinese stock market, which has been one of the worst performing markets in recent years. You decide which unloved area of the vast global financial markets appeals to you and maybe stick a toe in.
I hope you can join us next week, for my conversation with one of the brightest and most creative people in finance. MIT professor and hedge fund manager Andrew Lo will discuss the complexity and challenges of investing in modern markets and new ways to approach them.
If you would like to watch past WEALTHTRACK programs, please go to our website wealthtrack.com. Premium subscribers can see future programs 48 hours in advance, and additional interviews with WEALTHTRACK guests are available in our WEALTHTRACK Extra feature. And that concludes this edition of WEALTHTRACK. Thank you so much for watching and make the week ahead a profitable and a productive one.
