• Log In Log Out
  • October 3, 2013

    Chris Alderson Chris Alderson, president of T. Rowe Price International.

    Five years after the onset of the worst financial crisis since the Great Depression, global equity markets have largely recovered despite sluggish economies. Chris Alderson, president of T. Rowe Price International, discusses this historic period with Steve Norwitz.

    Norwitz

    So Chris, since the markets bottomed in 2009, we've seen a rather robust recovery in both developed and emerging markets around the world. Although emerging markets have underperformed somewhat more recently, what have been the key drivers of global equity returns in recent years?

    Alderson

    Steve, I think the key driver of equity returns is the unprecedentedly accommodative monetary policy that we've had around the globe. So I think post all financial crises, central bankers will typically choose inflation over deflation. They'd much prefer asset prices to rise, equities, property, etc.

    Now, there aren't many times in an investor's career that you get the chance to buy quality companies at two times earnings, so very accommodative monetary policy and selectively very low equity valuations led to a heady cocktail.

    Norwitz

    Thinking back to the collapse of Lehman Brothers and its aftermath, were you seriously concerned about whether or not the global financial system was going to go over the edge?

    Alderson

    We were, and I think if you read some of the evidence that's come out in the last few years, it was a real worry. And a lot of the key policymakers at the time were extremely worried about things. I think back to Hank Paulson and others. I think they navigated us through this whole process exceptionally well. And I think decisive, unprecedented action was warranted at that time.

    Norwitz

    When you compare the global market environment today with the very attractive valuations that existed, but also the economic and financial turmoil that existed, five years ago, how would you make that comparison? Is it more or less risky now in the environment?

    Alderson

    Well, I think it's far less risky today, and I think the environment generally looks pretty good. I think leverage is generally a lot lower than it was, which is clearly healthy both in the financial system and the corporate sector as well. Corporate sector net debt is one of the lowest we've seen in many, many years, and I think that's healthy.

    Interest rates are clearly much more supportive. I would say that, these days, valuations are probably on par with long-term averages, so they're neither cheap nor expensive.

    Norwitz

    So a lot of improvement over the last five years, and of course five years ago it was feared that the global financial system was on the verge of collapse. Is the financial system healed now, or are there lingering structural problems that still need to be resolved?

    Alderson

    I would say healing, not healed—we're not fully there yet. I think leverage has come down a long way across the financial system.

    Capital ratios have been rebuilt significantly. There's been a lot of capital raising across all the major money centered banks in the world.

    And the final thing to remember is that the yield curve is still very positively steeply sloping, and that tends to be a very healthy situation for banks that tend to borrow short and lend long.

    Norwitz

    Now, of course in the developed world, the economic growth coming out of this Great Recession has been fairly sluggish both in the U.S. and Europe and elsewhere, and given the depth of the recession, usually you might expect to see a much better recovery. Why do you think we've had such a sluggish global economic environment?

    Alderson

    I think the key reason can be summed up in one word and that word is deleveraging. The banks have delevered a lot—we talked about that a few minutes ago. That's definitely happened, and consumers have gotten a lot more risk averse. They've been less keen to take on debt, so consumers, the financial system, and the regulatory situation has tightened significantly on the financial system over these years.

    Norwitz

    While emerging and developed markets outside the U.S. have overall performed very well since the bottom in March 2009, markets outside the U.S. have significantly lagged the U.S. market performance during this recovery. Why do you think that is?

    Alderson

    Well, I think the U.S. is back. I think the U.S. is back in great shape. You had a dollar that was growing weaker for 15 years or so. I think the dollar was cheap and remains cheap. I think asset prices in the U.S. are cheap. I think you've had unprecedented innovation in the U.S. If you think about things…the Internet is basically completely controlled, or largely controlled, by U.S. companies. The whole switch to digital, digital revolution has been dominated by U.S. companies. I think the shale gas boost or benefit has been enormous in terms of lowering the cost curve for U.S. companies.

    Europe is catching up from here, and I think Europe is a couple of years behind in the economic recovery cycle from the U.S., so I'm optimistic about Europe, pretty optimistic about Japan.

    I think emerging markets are at a very different stage of the economic cycle because they had done well for the previous 15 years, currencies were more expensive, and simply the credit cycle is at a different point in time, and so it's more likely that EMs continue to slow and developed markets continue to improve from here.

    Norwitz

    Looking at the current environment, what do you see as the primary risk that investors in international markets ought to be considering today?

    Alderson

    Well, if I can maybe answer that with the primary risk that everyone seems to be worried about that I think is less of a worry, and that's all this talk about tapering.

    Valuations, as mentioned before, are not overly worrisome, but the outlook for equity markets is less positive than it was three years ago because valuations are now normal and not cheap, and probably my biggest worry actually is China.

    The Chinese renminbi hasn't moved at all, and therefore the competitiveness of the Chinese economy has just worsened a lot in the last six months coupled with about 25% wage inflation per annum in China for the last five years. So I hope the Chinese authorities can keep things together, and we think the financial system is OK, but that's the area that I'm most concerned about.

    Norwitz

    Looking ahead, how do you see the current outlook now for international investing?

    Alderson

    I think international investing still looks pretty good. I prefer developed over emerging. The credit cycle is really just starting to reaccelerate in the developed world.

    In the emerging world it's been strong for 15 years or so and I think will slow from here, and I just think in terms of competitiveness and relative currencies, we're seeing car plants relocate back from Poland to Spain.

    I think the economies are a couple of years behind the U.S. I think if you look at the financial system, the valuation of banks has moved up a lot. We think profitability is recovering.

    So I think you've got another two or three good years of equity returns, particularly from Europe but also from Japan.

    And the question really is: When do interest rates actually start to rise and go back to normal levels? I think that's quite some way off, and I think equity markets continue to perform well for some time until rates are a lot higher than they are today.

    Norwitz

    Well, Chris, thank you very much for sharing those reflections on the financial crisis with us.

    Alderson

    Steve, it's always a pleasure talking to you.

    This interview 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 a class of investor. Investors will need to consider their own circumstances before making an investment decision. The views are as of September 16, 2013, and may have changed since that time.

    Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.