Current Views and Opinions

Thoughts from our International Equity Team

China’s trade balance—the difference between the country’s exports and imports—came in negative in January and February of this year. Although these figures were influenced by seasonal factors, and the balance is likely to be positive for 2012 as a whole, it is true that the balance has been trending downward in recent years. In 2008, it stood at $298 billion, and it is expected to decline to $128 billion in 2012.¹

A key investor concern over the past couple of months has been the trajectory of corporate earnings. Expectations for the first quarter were for only low single digit growth compared with the comparable period last year. Though somewhat counterintuitive, these expectations may be viewed favorably as it sets a low bar for companies to exceed. So far that has been the case. As of April 19th, with approximately 20% of the S&P 500 having reported, nearly 70% of these companies have exceeded consensus earnings forecasts.

Reflecting upon the first quarter results bestowed upon us by the stock market, it seems likely that the majority of investors were not expecting such a strong performance. For example, the data tells us that the average hedge fund performed well below the S&P 500 index total return of 12.6%. With the benefit of 20/20 hindsight, what led many investors astray and caused them to miss this rally?

As average U.S. retail gasoline prices approach $4.00 a gallon, there is much concern of the growing threat of higher consumer gasoline outlays to overall consumer spending. Moreover, the entire sharp rise in gasoline costs has occurred in the normally quiet winter season, with the typical seasonal rise in driving just around the corner. In addition, the economy has been expanding at just over stall speed since the end of the great recession, and total driving statistics have been weaker for the past few years.

Accommodative barely begins to describe the monetary policies of key central banks across the globe. In fact, the world is awash in liquidity. Here in the US, after two rounds of quantitative easing (QE), the Fed has most recently come out and indicated that interest rates will likely remain exceptionally low through 2014. While far from a sure thing, many investors believe that a QE3 is a distinct possibility.

With our Presidential election date rapidly approaching, investors naturally are concerned over the impact the current or new residents of the White House might have on financial markets.  There is a general perception that Republican administrations have been resident during better stock market returns than their Democratic opponents, and hence a change at the top by the January 2013 inauguration would be a good sign for investors.  But counterintuitive as it may seem to some, this is not the case. 

U. S. credit markets remain dominated by the same two uncertainties that have persisted for months.  While some immediate sense of pressure has subsided from the Eurozone’s fiscal quagmire, reservations about a credible long term solution continues to drive safe harbor investors into the U. S. Treasury market. Concurrently, signs of a domestic economic recovery are building, and a continuation of positive data will inevitably turn further investment interest away from extremely anemic bond yields toward alternative prospects.

Residential investment as a percentage of GDP has fallen off of the proverbial cliff in recent years. Most recently it has stabilized at just over 2%, levels not seen in at least five decades. In fact, over this span residential investment has never been lower than 3% of GDP, and has averaged close to 4.5%. This is of great interest to us, as any type of reversion to the mean could have massive implications. Even if this metric were to merely approach prior trough levels, we believe that certain homebuilders and other related stocks could have strong appreciation potential.

Europe has dominated the financial headlines over the past couple of years and capital markets worldwide have been driven by news pertaining to the continent’s sovereign debt issues. The United States has been no exception, with highly correlated stock movements indicative of a market driven far more by broad macro issues than stock specific fundamental factors. While this has created a difficult ‘stock pickers’ environment, it is understandable as investors fear that a deterioration of Europe’s problems could materially affect our own economy.

On Friday December 9, European leaders concluded a two-day summit in Brussels with broad agreement on several fronts, including constitutional limits on structural deficits with an automatic correction mechanism, an acceleration of the €500 billion European Stability Mechanism to July 2012, and €200 billion of new lending from European national central banks to the International Monetary Fund.