Rough ride for international investors

By John Wilkinson

INVESTORS in international funds are still in for a bumpy ride, even though some opportunities exist in emerging markets, the head of the giant Principal Global Asset Management group has warned.

In Australia recently, Jim McCaughan, president of the US$138 billion American funds management business, said Asia and Latin America were emerging markets to look out for, while eastern Europe and the UK were also doing well.

But the outlook for the US was mixed, with some potential problems on the horizon that could turn into disasters.

“I feel quite optimistic about the US market, although we are seeing a Federal tightening cycle, which usually ends in financial crises,” he said while in Melbourne.

McCaughan said he believes the cycle will end in about a year as the US economy slowed down.

“What will happen next depends on a couple of possibilities,” he said.

“A (US) dollar crisis is still a possibility, as the true driver of the dollar’s value is the large current account deficit and other nations’ willingness to absorb growing amounts of dollars.”

Another possibility is a credit crunch and there have already been profit downgrades from General Motors and AIG, suggesting consumers are spending less.

“But US productivity is growing, rising 3 per cent a year, and unemployment is falling,” McCaughan said.

“We are also seeing the US stockmarket becoming less volatile, which might be due to less activity by hedge funds.

“Low volatility will be cyclical and the market should rise,” he said.