Europe's sovereign debt crisis, the prospects for emerging markets and the US economy dominated discussion at IMCA’s 2012 New York Consultants Conference, which attracted nearly nine hundred high-end investment advisors to the Marriott Marquis hotel in mid-town Manhattan yesterday.
Speakers at the Investment Management Consultants Association conference agreed on high growth prospects for emerging markets and sluggish progress for the US, but were mostly downbeat about Europe.
The most pessimistic assessment of the European economy came from John Brynjolfsson, managing director for Armored Wolf, who flatly declared that the continent was going into a depression.
As a result of the north-south political split in Europe, Brynjolfsson said he didn’t think Europe would find “credible ways to tackle the crisis” anytime soon and also expected a “dramatic collapse” in the euro from current levels.
What’s more, the European banking crisis “will likely” result in a “sudden” stop of both continental and even global commerce, he predicted during his presentation on “Global Macro Outlook and Real Asset Allocation.”
Europe: “entrenched interests in denial”
Although such a slowdown is already reflected in markets, said Brynjolfsson, who also oversees investment activity for Armored Wolf, “the entrenched interests remain in sufficient denial so as to make the risk of a more dramatic, possibly sudden, market reaction very real.”
While Brett Gallagher, deputy chief investment officer and senior portfolio manager for Artio Global Management wasn’t as pessimistic as Brynjolfsson, he said he thought Greece and “probably” Portugal would have to leave the eurozone.
The European crisis still lacks a long-term solution and recent monetary-loosening moves by the European Central Bank were just “buying time,” according to Milton Ezrati, partner, senior economist and market strategist for Lord Abbett & Co. Indeed, European equities are currently nearly universally under-weighted, noted Jonathan Golub, managing director and US equities strategist for UBS, who spoke at the Strategist Panel general session with Ezrati. But, Golub added, if Europe “doesn’t blow itself up,” those equities could well turn out to outperform the market.
Emerging markets: equities expensive on a “relative basis”
Despite disappointing results from emerging markets last year, Gallagher was bullish on long-term prospects and urged investment advisors to “ignore the near-term noise” and look at the structural underpinnings of developing economies. Equity prices in emerging markets are expensive on a relative basis, he said, but not by an absolute standard.
The middle class in developing countries was expected to increase by 1.5 billion people in the next ten years, Gallagher said, fueled by continuing urbanization and domestic consumption.
Although India’s growth lags China’s, Gallagher said the sub-continent’s economic potential may ultimately be greater than that of its rival. But he also made clear Artio is convinced China’s economic engine will continue to roar.
Concerns about over-building in China are legitimate, Gallagher said, but the fact that job growth remains the government’s “number one goal” is more important. “We believe the government will do whatever it takes to continue job growth,” he said.
Brynjolfsson was also bullish about emerging markets in general and China in particular. Developing countries will account for 50 per cent of global GDP growth in a few years, Gallagher said. And concerns about China’s red-hot economy overheating a year ago have been allayed, as the government’s central planners have succeeded in capping inflation and slowing down the real estate boom, he said. “China, Inc,” Gallagher added, “is a pretty well-run company.”
US economy: "a smoldering log"
No one at the conference could say the same for the US economy.
As US government debt approaches 100 per cent of GDP, Gallagher called it a “crucial point” that historically has meant slower growth and a time when “things begin to get fairly precarious.” No matter who wins the presidential election, he said, it will take “at least a six-year event” to bring debt down to a normal level.
Both Ezrati and Golub compared the US economy to a “smoldering log” that occasionally flares up when the government throws kerosene on it, but doesn’t have any fuel of its own. “At some point, it will have to unwind,” Ezrati said, either through monetization or inflation.
But in the short term, he said, “the market loves liquidity,” presenting investors opportunities for “risk-on” trades.