Portfolio manager Rob Lovelace offers his perspective on recovery and growth in China, the U.S., Japan, Europe and the emerging markets.
Kevin Clifford: Rob, I’d like you to take us on your, your trip around the world. You know, China’s been the dominant theme, but if you, you just take us through the other regions outside the United States, just your thoughts and impression on ‘15 and looking ahead to ‘16.
Rob Lovelace: Sure. China is the story in 2015, and it will be for many years to come. Depending on how you want to measure it, it’s the world’s second largest economy — may become the largest economy at some point in the next few years — and it clearly is something that needs to be thought about on its own. It often gets lumped in with emerging markets, because that’s where it was, but it really is its own entity. We need to think of it that way, the same way we think of Japan, and frankly, the way we think of the U.S. These are sort of the three individual countries that need to be looked at and considered on their own. Europe we think of together as a group, and then what’s remaining in emerging markets is probably the fifth piece of the puzzle.
The U.S. growth is really critical right now, because it’s the strongest anchor in the global economy. Earnings are not going to be growing as fast in the US, because profit margins are probably at high levels and multiples are probably as high as they’re going to be. So it’s really individual stock stories.
As you move over to Europe — where you’ve got the beginning of a recovery, and they’re still looking at doing quantitative easing — stocks have anticipated that to a great extent, but we haven’t really seen the earnings starting to come through yet. So in Europe, what we’re trying to focus on are companies that can benefit from being in that part of the market where you see earnings growth.
Japan is a similar story to Europe. You’ve got an economy that’s really been stalled for 20 years. They’re trying to use various aspects of quantitative easing to get it going. Some of that’s been anticipated in the market, but there have been disappointments. So we again are seeing individual companies there that look quite exciting.
China is in a very different place. It’s at the end of its cycle. It’s dealing with too much debt in the economy — how are they going to work through that? It’s dealing with the end of a movement of people from the rural communities into the cities, sort of a shift from industrialization as a growth engine more to consumption. And they’re very deliberate in the way they manage their economy. As we all know, it’s a much more controlled economy than any of the ones I’ve talked about so far, and so they’re able to contain some of these issues and drag them out over a long period of time to maintain social cohesiveness. But what that means is it’s probably going to be a while before China is growing rapidly the way it had been for a couple of decades. But it doesn’t mean, again, there aren’t opportunities there for companies that are able to offer high-quality, branded products or products that are safe in terms of quality of food and pharmaceuticals and other items. So there are a lot of companies able to do well.
If the U.S. can do well, Europe can recover, Japan can recover, that bodes well for the rest of emerging markets. They tend to be leveraged to economic growth in the developed world. China was the growth engine coming out of the great financial crisis. It was picked up by the U.S. We’re now hoping that Europe and Japan will come into it, and I think that may be the turning point for the rest of the emerging markets who have been suffering, really, since 2010.
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