April 22, 2013
|T. Rowe Price Global Stock Fund Manager David Eiswert|
2013 certainly started out hot, with U.S. equity markets hitting all-time highs. Some developed markets mirrored that success, while emerging markets lagged. Will these trends be sustained, or will other events dominate market news? In a recent interview, David Eiswert, Global Stock Fund manager, discusses the outlook for global markets.
Over a four-year bull market, the MSCI All Country World Index has almost doubled in value. Eiswert cites the 2008-2010 financial crisis as a major cause of this success. Companies went into "bunker mentality"—cutting costs and increasing efficiency. For investors, crisis created opportunity, as stock valuations became attractive and companies emerged stronger.
Another factor in the recovery of equity markets has been a loosening of central bank financial policy worldwide, creating a great deal of liquidity. Typically, Eiswert explains, governments want to avoid deflation and create moderate inflation to stimulate investment and growth. To this end, central banks have kept interest rates low and supplied liquidity to markets still struggling with bad debts.
As time moves forward, though, market gains are less about the recovery and more about emerging economic trends. For example, the shale oil and gas revolution has shifted how we think about energy. New technologies have created access to vast reserves in countries that used to be much more dependent on importing oil. Oil and natural gas prices have fallen, stimulating consumption and growth opportunities.
For the first quarter of 2013, emerging markets did not perform as well as they have in recent years. But Eiswert warns against lumping them all together. In the BRIC countries—Brazil, Russia, India, and China—investors became accustomed to strong performance over the last decade, and these are the countries that are struggling more now. China has spent the last decade building up infrastructure, which drove up demand for commodities. Now economic growth and demand are slowing. As a result, countries like Brazil and Russia—that are heavily exposed to commodity markets—are no longer experiencing a steady stream of demand from China.
However, explains Eiswert, in emerging markets where growth has been the result of development, we are still seeing solid equity performance. These countries include Turkey, Mexico, Thailand, and Indonesia.
Overall, Eiswert believes this is a great time for investing in equities. Many businesses are still keeping large amounts of cash on their balance sheets, which can translate into missed opportunities. The companies that begin to reinvest in their businesses, Eiswert says, will drive returns over the next three to five years. Unfortunately, investors have become highly risk averse and too focused on near-term earnings. They will have to shift their mindset to a longer view to be successful moving forward.
The U.S. has been able to recover faster than other countries for several reasons. The U.S. economy is more flexible and has the ability to shift capital among industries more quickly. Additionally, the crisis in the U.S. was largely driven by housing, which is finally showing a strong path to recovery.
In Europe, investors have caught on to a pattern of crisis, response, and recovery. "Each crisis, we become a little less concerned that it's the end of the world," says Eiswert. As confidence grows that European political and central bank leaders can deal with crisis, investors begin to see opportunity instead of doom when crisis hits.
The Japanese market has lagged other developed markets for years but may now be one of the more compelling developed markets in the world. A new prime minister and new central bank head are focused on reinflating the economy, getting wages up, and stimulating growth.
The views are as of April 4, 2013 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Stocks and sectors may not perform in line with the managers' expectations. Funds that invest overseas generally carry more risk than funds that invest strictly in U.S. assets, due to factors such as currency risk, geographic risk and emerging markets risk. Because of the concentration in rapidly developing economies, investing in emerging markets involves a high degree of risk. Diversification cannot assure a profit or protect against loss in a declining market.