Another opinion from Barons
From Barron's - interview with Richard Bernstein about risks in emerging markets (in part):
"Why are you so bullish on the U.S.?
People continue to overestimate the risks in the U.S. I would argue that they grossly -- and I'm not using that word lightly -- underestimate the risks in the emerging markets. A lot of the problems that people think are inevitably going to crop up here, including inflation and out-of-control money growth, are actually happening in the emerging markets. We aren't seeing those risks here. But the thinking is that it is inevitable and it has to happen here. A lot of people have talked about how the great rotation will be a shift from bonds to stocks. But that's not right. The great rotation -- and the biggest decision you have to make for your portfolio -- is that for five to seven years, it is not going to be bonds to stocks, but rather non-U.S. assets to U.S assets. We are maybe in the fourth inning of a secular period of outperformance for U.S. assets. Think about this: The Standard & Poor's 500 has outperformed emerging markets now for five years. Nobody cares, and it pains people to admit that the U.S. market has been outperforming."
....
"You've been bearish on emerging markets for several years. Why are you so concerned about them?
The hyperbolic credit creation in China has gotten worse, for example, and the money supply problems in India have gotten worse, as have the corporate fundamentals in China. The Chinese corporate sector is now one of the most levered in the world, and its marginal return on investment is going down. So the efficiency of that economy's credit is getting lower and lower. That's not healthy; that's not a growth story. Expectations are too high. In 2012's fourth quarter, just under 60% of emerging-market companies reported negative earnings surprises, compared with 28% in the U.S. And the corporate fundamentals in emerging markets continue to erode.
Why have you been overweighting U.S. small- and mid-caps, in particular industrial companies and banks?
The consensus has been that you should buy large-cap multinationals, but as I said, people have grossly underestimated the risks in the emerging markets. And the large multinationals' plan is to try to grow through the emerging markets. Why would we want to be exposed to the biggest area of the global credit bubble that has yet to deflate? That makes no sense to us. If you start playing more domestic-oriented U.S. companies, you naturally start going down in market cap . So that's what brought us to smaller and mid-cap companies. That's naturally pushing us away from large-cap stocks.
What's your thesis about small-cap industrials?
We call it the American industrial renaissance. Small- and mid-cap industrial-manufacturing companies in the U.S. are gaining market share. A lot of people say, "What industrial renaissance? These companies aren't like the big leaders." Of course not. When it is that visible, the theme will be over. That's when you'll have the industrial renaissance growth fund, the opportunity fund, and all these different funds.
What's to like about smaller U.S. banks?
Part of our thesis is about where the growth is. I would argue it is in smaller banks. What bubbles always do is create capacity. Think of the gold rush in the 1840s. When the gold rush ended, all of these towns became ghost towns. Bubbles create capacity that isn't needed once the bubble subsides. In a global credit bubble, that capacity is bank balance sheets . And when the credit bubble contracts, you don't need those big balance sheets anymore. That is really the argument that is going on in Washington. The major banks are fighting tooth and nail against having their balance sheets contract. They are telling the politicians that regulation will curtail lending. However, they are not doing a lot of traditional lending anyhow. What they are doing is commodity swaps in Botswana. If you believe the global credit bubble is going to resume its expansion, you would want to play big banks. If you think the global credit bubble will deflate, the story becomes traditional lending. Well, the big guys have no interest in traditional lending. So where is that traditional lending going on? In small- and mid-cap banks.
Where else is there opportunity in the U.S.?
We continue to like the U.S. consumer. Too many investors forget that markets don't care about whether the absolutes are good or bad. Markets care about better or worse. So the unemployment rate is 7.5%. Is that good in an absolute sense? No. But you can't think like a politician, and you can't think like an economist. You must think like an equity investor. The equity investor will say, "It used to be 10%, now it is 7.5%. That's good." That's why the market is up, and that's why consumer cyclicals have outperformed over the past couple of years. So, we still have a pretty significant overweight on the U.S. consumer. Our biggest holding is the Consumer Discretionary Select SPDR [XLY].
Why are you underweight energy and commodities?
Two reasons, one cyclical, the other secular. Starting with the cyclical: Energy and commodities are traditional late-cycle plays. Why? Because inflation is a late-cycle play. You need bottlenecks in the economy, and you need demand to outstrip supply. I don't care about all these guys who say inflation is imminent because the Fed is printing money. Demand must outstrip supply to get inflation. But we aren't late in the cycle. The Fed isn't tightening. The secular reason is that if you agree with us that emerging markets have been overstimulated by the global credit bubble, that explains the demand for commodities on a secular basis. Again, commodities are very credit-sensitive. I find it quite amazing that people will generally agree that the global credit bubble is deflating. But then they want to play credit-sensitive investments like energy and commodities and gold. That doesn't make a lot of sense."
From Barron's - interview with Richard Bernstein about risks in emerging markets (in part):
"Why are you so bullish on the U.S.?
People continue to overestimate the risks in the U.S. I would argue that they grossly -- and I'm not using that word lightly -- underestimate the risks in the emerging markets. A lot of the problems that people think are inevitably going to crop up here, including inflation and out-of-control money growth, are actually happening in the emerging markets. We aren't seeing those risks here. But the thinking is that it is inevitable and it has to happen here. A lot of people have talked about how the great rotation will be a shift from bonds to stocks. But that's not right. The great rotation -- and the biggest decision you have to make for your portfolio -- is that for five to seven years, it is not going to be bonds to stocks, but rather non-U.S. assets to U.S assets. We are maybe in the fourth inning of a secular period of outperformance for U.S. assets. Think about this: The Standard & Poor's 500 has outperformed emerging markets now for five years. Nobody cares, and it pains people to admit that the U.S. market has been outperforming."
....
"You've been bearish on emerging markets for several years. Why are you so concerned about them?
The hyperbolic credit creation in China has gotten worse, for example, and the money supply problems in India have gotten worse, as have the corporate fundamentals in China. The Chinese corporate sector is now one of the most levered in the world, and its marginal return on investment is going down. So the efficiency of that economy's credit is getting lower and lower. That's not healthy; that's not a growth story. Expectations are too high. In 2012's fourth quarter, just under 60% of emerging-market companies reported negative earnings surprises, compared with 28% in the U.S. And the corporate fundamentals in emerging markets continue to erode.
Why have you been overweighting U.S. small- and mid-caps, in particular industrial companies and banks?
The consensus has been that you should buy large-cap multinationals, but as I said, people have grossly underestimated the risks in the emerging markets. And the large multinationals' plan is to try to grow through the emerging markets. Why would we want to be exposed to the biggest area of the global credit bubble that has yet to deflate? That makes no sense to us. If you start playing more domestic-oriented U.S. companies, you naturally start going down in market cap . So that's what brought us to smaller and mid-cap companies. That's naturally pushing us away from large-cap stocks.
What's your thesis about small-cap industrials?
We call it the American industrial renaissance. Small- and mid-cap industrial-manufacturing companies in the U.S. are gaining market share. A lot of people say, "What industrial renaissance? These companies aren't like the big leaders." Of course not. When it is that visible, the theme will be over. That's when you'll have the industrial renaissance growth fund, the opportunity fund, and all these different funds.
What's to like about smaller U.S. banks?
Part of our thesis is about where the growth is. I would argue it is in smaller banks. What bubbles always do is create capacity. Think of the gold rush in the 1840s. When the gold rush ended, all of these towns became ghost towns. Bubbles create capacity that isn't needed once the bubble subsides. In a global credit bubble, that capacity is bank balance sheets . And when the credit bubble contracts, you don't need those big balance sheets anymore. That is really the argument that is going on in Washington. The major banks are fighting tooth and nail against having their balance sheets contract. They are telling the politicians that regulation will curtail lending. However, they are not doing a lot of traditional lending anyhow. What they are doing is commodity swaps in Botswana. If you believe the global credit bubble is going to resume its expansion, you would want to play big banks. If you think the global credit bubble will deflate, the story becomes traditional lending. Well, the big guys have no interest in traditional lending. So where is that traditional lending going on? In small- and mid-cap banks.
Where else is there opportunity in the U.S.?
We continue to like the U.S. consumer. Too many investors forget that markets don't care about whether the absolutes are good or bad. Markets care about better or worse. So the unemployment rate is 7.5%. Is that good in an absolute sense? No. But you can't think like a politician, and you can't think like an economist. You must think like an equity investor. The equity investor will say, "It used to be 10%, now it is 7.5%. That's good." That's why the market is up, and that's why consumer cyclicals have outperformed over the past couple of years. So, we still have a pretty significant overweight on the U.S. consumer. Our biggest holding is the Consumer Discretionary Select SPDR [XLY].
Why are you underweight energy and commodities?
Two reasons, one cyclical, the other secular. Starting with the cyclical: Energy and commodities are traditional late-cycle plays. Why? Because inflation is a late-cycle play. You need bottlenecks in the economy, and you need demand to outstrip supply. I don't care about all these guys who say inflation is imminent because the Fed is printing money. Demand must outstrip supply to get inflation. But we aren't late in the cycle. The Fed isn't tightening. The secular reason is that if you agree with us that emerging markets have been overstimulated by the global credit bubble, that explains the demand for commodities on a secular basis. Again, commodities are very credit-sensitive. I find it quite amazing that people will generally agree that the global credit bubble is deflating. But then they want to play credit-sensitive investments like energy and commodities and gold. That doesn't make a lot of sense."
