Negative investors risk missing the growth train in 2014
Brandywine’s Francis Scotland tells Mike Taylor that a continuing hang-over from the GFC may lead negative investors to miss the growth train in 2014.
After being traumatised by the global financial crisis (GFC), many investors are finding convenient excuses not to re-enter the market, according to leading North American fund manager, Brandywine Global Investment Management director of Global Macro Research, Francis Scotland.
Indeed, Scotland believes the trauma of the GFC is so deeply ingrained that it might take many investors upwards of a decade to put it behind them.
He believes this negativity, while understandable, is largely misplaced because in his view 2014 will be a year of recovery – notwithstanding the fact that many people, as they had this year, would still be looking for things that could go wrong.
“Since the financial crisis of 2008 people have been looking for ‘tail risk’ – thinking in terms of what can go wrong,” Scotland said.
“And we’ve had all sorts of potential candidates for what can go wrong, from the European collapse, the fiscal cliff in the US and the China crash landing.”
However he said that, gradually, the systemic risks had diminished and it now made sense to look for what could go right rather than what could go wrong.
Scotland said that when people looked to see what had gone right, they would note that bond yields has gone up, yield curves have steepened, real yields have risen, gold has fallen and the equity-risk premium has been squeezed.
“So the market is giving you an unambiguous declaration of optimism on the outlook for non-inflationary economic growth around the world,” he said.
Speaking at Brandywine’s headquarters in Philadelphia, Scotland said that the question for investors as they viewed 2014 was whether it was going to be the year when “the rubber meets the road”.
“Is this the year when it’s really going to happen – when we’re going to see some acceleration in economic growth at least in the leading countries, primarily the US?
“Are we actually going to see some kind of economic expansion beyond the kind of meagre growth we’ve seen for the last three, four or five years?”
Scotland said that in his assessment 2014 was building as the year during which the risk of success would gain traction.
“In our view, we’re on that path,” he said. “I think the surprise in the US in 2014 is going to be better than expected growth, better than expected strength in stocks.”
Further, Scotland said that he believed the US might be only half-way in terms of its economic expansion and that it might ultimately prove to be one of the longest post-war expansions on record.
However, Scotland acknowledged that for many people it might not feel like an expansion because it was lacking some of the “juice” which had been present in previous periods such as lending and employment growth.
Nonetheless he said businesses were doing very well, with profit margins at record levels and with lots of cash in the system.
“But they don’t really need to borrow money when their operations are flush with cash,” Scotland said. This was something that needed to be seen in the context of households also not wanting to borrow money.
He said this suggested the US might be headed towards something which had not been witnessed since the 1960s – a capital spending recovery with not a lot of credit behind it.
While Scotland is concerned about the degree to which investors are continuing to be unduly negative, he well understands just how deeply the global financial crisis scarred their psyches in 2008.
“What happened in 2008 is going to take a generation to forget, and I can’t overstate how traumatic that was for this industry. In the US alone you wiped out $8 trillion of household net worth and that is over 50 per cent of current nominal gross domestic product,” he said
Scotland said that the most significant aspect of what happened in 2008 was a complete loss of trust and confidence in the system.
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