The European Central Bank (ECB) has been trying to boost bank liquidity by offering long-term refinancing, which has calmed investors’ nerves, says Grant Bowers, portfolio manager and vice-president at Franklin Equity Group. The lead portfolio manager of the Franklin US opportunities Fund, he tells Mehul Shah the sustainability of the current rally in global stock markets will depend on the way events in Europe and the geo-political situation in West Asia unfold. Edited excerpts:
Global stock markets are off to a great start in 2012. Is this a bear market rally or something here to stay?
Investors seem to be taking comfort from the positive data out of the US and signs that policy makers across the Atlantic are trying to address some of the tough issues. There is an increasing effort to balance fiscal consolidation with sustaining economic growth momentum. The sustainability of the rally will depend on the way various global events unfold (read Europe, geo-political situation in West Asia, etc). Overall, we are positive about the medium- to long-term prospects of equities and the US economy.
US stock markets outperformed emerging markets in 2011. Do you expect this trend to continue?
Strong earnings growth, along with positive economic data, led to US equities’ outperformance of the emerging markets. Also, increased risk aversion in the second half of 2011 led to global investors’ flight to safety. The performance is also a clear reflection of the inherent strengths of the US companies that emerged stronger from the 2008 crisis, with leaner operations and stronger profits. Operating margins are at new highs and many of the leading companies are witnessing good and free cash flows. Also despite the outperformance, valuations remain attractive when compared to historical levels, making it a good time to take exposure to a portfolio of US companies. It would be difficult to predict market direction over the short term, but we expect markets to track earnings growth trends over the medium to long term.
Recent economic data in the US has been encouraging. Do you think the risk of double-dip recession has subsided?
Yes, we believe the US economy has exhibited good resilience amid the headwinds set since 2008. Recent data on various fronts, such as employment, manufacturing and retail sales, point towards improving economic conditions. The extension of payroll tax cuts should help sustain demand. If we don’t see a deterioration of the situation in Europe, US markets should witness steady growth over the coming years.
What’s your take on the sovereign debt crisis in the euro zone? Will that continue to bother investors or is some resolution in sight?
We have seen increased commitment from policy makers in Europe to address the structural issues in the region since the last quarter of 2011. ECB has been trying to boost bank liquidity by offering long-term refinancing. That has calmed investor nerves. Europe will remain a key driver of global investor sentiment in the short term.
