Iraq only part of the story, say international fund managers

(January 31, 2003) Not a time for general rejoicing. That’s how Don Coxe, chair and chief strategist with Harris Investment Management in Chicago, described the current U.S. investment climate during a conference call earlier this week hosted by BMO Mutual Funds. Fund managers from North America, Europe and Asia offered their views on world equity markets to investors looking to make decisions during the busy RRSP season.

In the U.S., said Coxe, a $1.9 billion-a-day current account deficit is taking its toll on stock markets and the value of the greenback. Fear of war and other geopolitical risks only account for a fraction of the problem with the American economy. “It’s going to be another tough year for the markets and Iraq is the excuse everybody’s using for it,” he said. “But I would assign it no more than a 10% weighting in terms of what’s really wrong with our economy and our stock market.”

Things aren’t looking much better in Europe, according to Richard Robinson, director of Rothschild Asset Management in London. Agreeing with Coxe, he said that Iraq is only part of the story. “Overall in the markets,” he noted, “a very, very testing backdrop out of Europe.” A bear market of the magnitude experienced in worldwide equity markets means that “investors’ money will fly to the relatively low valuation, high current yield stocks, the short duration stocks.” Lower growth and deflationary forces are the new economic realities for the 2000s, he said.

In Asia, Japan is sending mixed signals, said Yukiko Sujimoto, managing director and portfolio manager at JP Morgan Fleming Asset Management in London. While she noted strong potential for a modest, 20% market recovery, she also pointed out a 35% chance that Japan’s economy could fall back into recession. Outside of Japan, things look more promising. “We think last year’s laggards may be this year’s leaders as Hong Kong, Singapore and India are all expected to show significant increases in their pace of growth,” she said.

Despite all the bad news, there are signs of life. In Asia, Sujimoto looks to emerging markets for growth. “In 2002,” she said, “emerging Asia grew three times faster than the global average and its growth is expected to continue in 2003 at about a 4.5% level.” China is seen as leading the way as a key manufacturing hub, importing goods from the rest of the region.

In the U.S., Coxe sees some areas of outperformance, particularly in the commodities, led by gold, natural gas and oil, and base metals. Coxe also pointed to short duration stocks and dividend-paying stocks as areas that will continue to perform well, especially if U.S. President Bush can push through his dividend tax credit. “In a time of market turmoil, the one kind of return you can count on is dividend.” Otherwise, he said, “I think this is a case in which the long duration non-dividend paying concept stocks will continue to get hammered.”

Here in Canada, there are more opportunities. Said Coxe, “The Canadian market is definitely my favourite of the G7 markets and has been for more than a year. First of all, the currency is the cheapest within the G7. Second it’s got good weighting toward commodities and third, it’s got through the Nortel and the JDS idiocy so that’s been taken out of the valuation in the market.” He recommends placing emphasis on dividend and income funds, rather than general equities.

Caroline Cakebread is a Toronto-based investment writer.

(01/31/03)