Dangers and Opportunities
Financiers beganbegan 2015 with a slow worldwide economy, low oil prices, a strong Dollar, and a deflationary Europe with great uncertainties on the progress of the United States economy and the recent launch of Europes quantitative easing. The concern is, what chances lie ahead? This article highlights the main subjects covered in an interview between Mr. Frank Suess, CEO and Chairman of BFI Capital Group, with the around the world prominent Swiss fund manager, Mr. Felix Zulauf. Mr. Zulauf currently heads Zulauf Asset Management, a Switzerland-based hedge fund and has forty years of experience with international financial markets and asset management. He has actually belonged to the Barrons Roundtable for over twenty years.
Felix Zulauf, Swiss fund supervisor and enduring member of the Barrons roundtable
Photo credit: Sigi Tischler/ Keystone
Frank Suess: Felix, first I would likewant to thank you for putting in the time to address us. You are a popular investor and fund manager with a solid performance history over the previous 40 years. In those 40 years, youve encountered lots of low and high in monetary markets and company cycles. What do you think about the existing cycle we are in?
Felix Zulauf: The current cycle is extremely uncommon, since never ever before have we seen authorities, central banks in certain, stepping in on such a huge scale and pumping so much cash into international monetary markets. Hence, international monetary markets are more distorted than ever in the past and appropriately, the dangers are really high. Investing becomes very tough in such an unprecedented environment, as it cant be as compared to previous circumstances.
Frank Suess: When you take a look at our monetary markets today, exactly what would you think about are the most alarming styles? And how can they affect the current situation?
Felix Zulauf: Worldwide need has damaged due to structural reasons. This is a scenario that can not be improved by pumping liquidity into the system. Zero and even unfavorable interest rates have actually distorted the appraisal and rates of essentially all possessions. We understand that the longer a distortion prevails, the more financiers get utilized to it and it becomes the new typical to them. Thats where the issue lies!
I see three potential hazards: 1) Inflation and bond yields increase and start to puncture asset bubbles; 2) The world economy gets hit once more by more deflation due to a weaker Chinese currency that would reinforce deflationary pressure, dampen rates and business earnings and lastly the real international economy; and 3) Asset costs continue to increase and finally exhaust on the upside at extremely high and unsustainable appraisal levels. In my view, # 3 will certainly be the most likely result.
A prospective source of trouble: the yuan click to expand.
Frank Suess: Central banks, with the US Federal Reserve in the lead, have actually started a series of quantitative easing and credit stimulus packages. Especially considering that the crisis in 2008, main bank influence on monetary markets and the global economy has reached an unmatched level. What is your view on this? Has this huge market intervention been justified? Will central bankers actually be able to guide the worldwide economy toward sustainable development?
Felix Zulauf: Markets are the finestthe very best capital allocators and commercialism works if the authorities let it take its course. Had they let markets fix all the unwanteds in previous business cycles instead of printing increasingly more money, the world would be in a far better shape today. But our authorities had the dream to smooth the businessbusiness cycle by not permitting the marketplaces and the system to fix itself. It is hard to remedy this in a painless method, which is exactly what the authorities are trying to do. That wont work.
Assorted central organizers no pain-free way out
Frank Suess: How do you see this affecting built up wealth, especially in the United States? You were previously quoted as stating that it will be a traders dream, but an investors hell. Could you kindly discuss to our readers what you mean with that statement?
Felix Zulauf: My inkling is that the US market will certainly not make much progress this year however rather go up and down. This might be excellent for skilled traders however bad for investors holding stocks that carry out more or less in line with the Samp;P.
Frank Suess: Following the Americans, and after that the Japanese, Europe has actually now joined the QE bandwagon. And, European stock exchange, in basic, currently look more reasonably priced than those in America. Should we now reallocate a larger part of our portfolio into European stock exchange?
Felix Zulauf: On a relative basis, European markets are now greater priced than in 2007 versus the US. But cyclical forces stay in favor of European stocks due to the highly extensive ECB policies. Europe has no rate of interest or even negative rates in some cases. I wouldnt even be amazed to see German 10-year Bonds going to negative yields (they are 0.25 % at present). There is plenty of liquidity around and the banks can not provide it out. However still, Draghi wantswishes to flood the marketplace with more than one trillion of newly printed Euros. That is outrageous! The reasoning: Deteriorate the Euro even further to help the structurally uncompetitive economies like Greece, Italy or France. That is all a very far cry from sound central banking, of course. For a while longer it will certainly be bullish for European stocks, particularly for German equities, as they had actually currently performed well when the EUR/USD was trading at 1.40.
10 year Bund yield just below 20 basis points as of today click to increase the size of.
Frank Suess: The depression in the oil cost has been a significant subject since last summer. Aspects include a drop in global production, Americas increased production of shale oil, lower production by OPEC members. What is your interpretation? And where do you expect oil rates, and possibly commodity rates, in basic, going forward? Who are the winners and losers right here?
Felix Zulauf: The commodity cycle peaked in 2011 and I presume the bearish trend will certainly last another few years. Oils decrease belongs to that down cycle. Demand and supply elements are at work right here. Oils market share of overall energy has been decreasing for some years. The Saudis desire to alter this by having a lower price and want others to cut down on production. On the demand side, the world is getting a growing number of energy reliable (the car sector is an example) and therefore need is now increasing, but at a slower rate than the economy. The winners stay the energy consumers, in a broad sense, and the losers are the energy producers. That associates with individuals, business, industries and nationwide economies. However naturally, energy is constantly just one element of the entirethe entire investment landscape.
Frank Suess: Throughout the years, youve had great direct exposure to Asian markets, specifically Japan. Many eyes are now set on China. The Chinese are confident they will report strong growth varieties of 7 % this year, while lots of experts disagree, saying that it is unreachable on low export figures. What do you make of the existing efficiency of the Chinese economy and its impactinfluence on Europe and the US?
Felix Zulauf: Chinas financial investment and credit boom was the greatest in recorded history. It came to a head a while earlier and is now in a downswing. After such a boom, the economy generally slows for 5-7 years which is whats occurring in China. 7 % development is a joke; I would rather say it is now starting to fall listed below 3 % and wont stop slowing for numerous years. China will certainly be compelled to help the banking and shadow banking system to digest the fallout of the previous boom and that implies it will become a growing number of expansive in its financial policy. In turn, this will certainly deteriorate the Chinese currency. But China is moving gradually which enhances the stagnation because it is scared of a huge wave of capital outflows that could develop a shock to the banking system. For this reason, they play down problems and move gradually. But ultimately, the currency will deteriorate additionally. When the Renminbi deteriorates by 10-15 %, it will damage costs of around the world traded goods as soon asagain. In turn, this will certainly dampen inflation even more in addition to profits, revenue margins and revenues in the business sector around the globe. When this takes place, numerous equity markets may realize that the emperor has no clothing. Simply puts, China is essential to the rest of the world.
Frank Suess: Greece is on the verge of collapse and possibly leaving the Eurozone. Negotiations are still continuous, and the circumstance is still developing. Do you see a way out of the Greek take advantage of scenario? In your view, should the Greeks stay or go out the Eurozone? And exactly what is the best strategy for both celebrations, in your viewpoint?
Felix Zulauf: Of course, Greece is bust like several others. But as long as the fiction that everything is all right and funding will be offered remains, the world doesn’t fret. My inkling is that the percentage of those in European politics that are fed up with Greece is increasing and for that reason it is just a matter of time up until Greece defaults. A major restructuring and reform with Greece staying in the euro zone will be very hard to attain due to the fact that the ECB will barely provide the capital essential for the refinancing of a reorganized Greece. Thus, an exit may occur and the Drachma might be reestablished with a value that is maybe 50-70 % lower as compared to todays currency. At that time, Greece has a true opportunity to recuperate. However, this would set prejudice of exiting.
Greeces stock exchange has declined precipitously since 2007 click to expand.
Frank Suess: When the SNB removed the cap on the CHF in January, did you see it coming? How would you assess this decision by the SNB, noting that only days earlier they said they would keep the cap? Can we anticipate more of these shocking decisions in the near future and why so?
Felix Zulauf: Well, I was very sure they would ultimately separate from the ECB policy, however had rather anticipated it to happen earlier. As a policymaker, you can not inform if the truth could jeopardize your own policy. That is part of the game authorities must play. Well, we might see capital controls of some sort in the years ahead, since it is unbelievable to expect that all gamers are prepared to accept exactly what other countries are trying to do at their own cost.
Frank Suess: What markets would you think about the most positive or unfavorable? What investment opportunities would you say could develop in the course of the year that one should take benefit of?
Felix Zulauf: All equity and currency markets are very extended, at present. And numerous of the bond markets are as well. Hence, risk is high as assets are priced off an absolutely no interest rate policy. I stated last year that currency motions will play a crucial role. I anticipated the reinforcing USD at the start of 2014, which is over a year back. And European financiers made 40 % in United States equities over the last 12 months while an US financier lost 10 % in European equities, all computed in their house currency. Thus, if you do not comprehend currencies, you may get lost in these markets. I would certainly remain as far away as possible from emerging market currencies, bonds and also equities. On the favorable side, I anticipate the USD strength to continue over the next 2 years approximately however see some potential for a correction this spring. Long United States treasuries are the most appealing set income instrument on the planet due to the fact that the economy will soften again versus the basic desires of an economic reacceleration and rate hikes might be delayed for longer than generally anticipated. In equities, I discover German equities the most appealing. Prominent German multinationals made great cash when the EUR/USD was trading at 1.40. It is trading now, at the time of this interview, near 1.08 and it needs to be a treasure trove for them in regards to earnings. I would make use of short-term problems to purchase more, but constantly hedge the currency.