Up Close with Global Equity Portfolio Manager Greg Fuss
The stock market weakened early this year before rebounding. What’s driving recent market volatility?
It’s not unusual for fear to periodically creep into the market during a lengthy bull run, and that’s what happened in the first six weeks of 2016. There were several concerns, spearheaded by uncertainty about China’s economic growth rate. While this is a real concern, today it seems as if any piece of news, good or bad, gets extrapolated and blown into more than it really is. In this case, not only were Chinese companies affected by selling pressure, so were a lot of Japanese, European and U.S. companies that sell into China. The market’s assumption was that their growth would be a little slower than expected.
What led to the subsequent turnaround?
Worries subsided as the issues affecting China began to look more like a normal cyclical downturn than something more worrisome. For example, though China’s economy is decelerating, there is a big difference between slower growth and no growth, which is not the case. On the bright side, China’s property market is starting to perk up and consumer spending is strong as the Chinese government tries to spur the development of a consumer-led economy.
How do you view the prospects for the U.S. economy?
One of the interesting ways to look at the U.S. economy is to examine the change in nonfarm payrolls over time. Even though employment in oil-producing states is down slightly, job growth is picking up elsewhere. So we have fairly remarkable stability in this important part of the economy. The strong U.S. dollar has hurt manufacturing profits, but savings from lower energy costs have been a distinct positive. When you add it all up, you have moderate growth.
What are some of the investment themes that you find appealing right now?
One is the oil sector. Crude oil prices fell further than many had expected, which created opportunities for those with a long-term investment horizon. Sagging prices have caused U.S. production to decline as wells are gradually shut down. Meanwhile, you’ve had major oil companies announce big cutbacks in capital expenditures. That means the glut of oil will start to dissipate and supply will eventually fall enough that prices will rise. I don’t think oil prices need to go a lot higher for a number of oil stocks to do reasonably well.
Another area of interest is health care. Demographically speaking, it’s clear that there will be more demand as the global population continues to age. A variety of new treatments are under way, and we try to be in front of those changes. The challenge is that there are typically several companies aiming to be the first in rolling out new therapies, and it’s not always clear which ones will capture the lion’s share of the market. Those that succeed could be very positively impacted. It’s an ever-shifting landscape, and we are working hard to stay in front of it.
Broadly speaking, selling pressure early in the quarter hurt stocks across many industries. That allowed us to establish positions in stocks we had wanted to own for a long time but held off on because the valuations were not attractive. In several cases, we were able to add stocks to client portfolios at valuations that had not been available for a number of years. This was the case in areas such as technology, financial services and industrials.
We’re in the midst of an unpredictable presidential campaign. Does the potential outcome of the vote affect your investment thinking?
So many things can happen from here that trying to align a portfolio to a possible outcome seems premature, if not reckless. As important as the election is, the winner of the presidency is just part of the story. Congress will broadly determine what can and can’t be done, so there may continue to be gridlock regardless of who prevails. Capital Group analysts are examining the potential effects on specific industries, and some could be affected more than others, but it’s important not to overestimate the impact the election may have on individual companies.