Europe and Japan – the Two Favorites of this Year?

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larryGreat Britain will more likely to remain in the EU, than leaving it; Europe managing the migrant crisis has a higher chance, than being crushed by it – says one of the major asset managers of the world, Larry Hatheway, who is also chief economist at the Switzerland-based GAM Holding, which is present in 11 countries, and owns the Julius Baer Funds. Our interviewee, who used to be global head of macro strategy at UBS, elaborates on why he thinks that the dollar stays strong, and that oil prices will not grow significantly. He also talks about why he believes the decision-makers of China, and why he calls the attention of investors to Europe and Japan.

Péter Zentai: Which investment vehicles do you prefer and neglect this year? Please rank your 2016-favourites!
Larry Hatheway
: I do not really find this a wise approach. Those years have passed, and will hardly ever come back, when asset managers were debating over which shares, bonds or other capital market products were going to perform the best.
Today, our goal is to prevent capital loss. Every asset class is exposed to serious (exchange rate) fluctuation. In 2016, capital markets will be dominated by uncertainty and confusion. Both share and bond prices are going to drop. We have to admit, markets are overpriced in general.
To answer your question, I would say, we think that the American market is expensive, whereas there are better fundaments, and prospects for a more dynamic company and national economy growth in Europe and Japan. We are focusing on these markets. In the case of Japan, we prefer the shares and bonds of small and medium-sized enterprises.

Europe as a favourite? Despite the possibility of Britain leaving the EU, and the unpredictable consequences of the migrant crisis, which might even shake German politics?
I think, a positive outcome is more likely in both cases. Until then, we have to face severe crises, which will significantly affect markets, increasing their volatility. However, at the end, Britons will put aside their negative feelings about the Union, and make up their minds – due to the common sense and the economic interest of the majority.
Even though, the migrant issue is more complex, we can assume that a European compromise will be reached, despite the EU has to face numerous crises at the same time. Dealing with them simultaneously will certainly be extremely challenging. However, we have seen that at times of great crises, Europe has always managed to get itself together at the end. This is in its nature…
All in all, Europe is indeed on of our preference for investments because the European monetary policy seems to bear fruit. More money is staying at households, and the fundaments for increasing consumption are present. The Spanish, Italian, and even the Greek financial-economic situations are getting better. The Union, including Southern Europe, has begun to grow, and unemployment rates are decreasing.

Oil price fluctuation has a significant effect on markets. What are your predictions in this regard?
The price of oil and geopolitics remain closely connected this year. For instance, the Iran – Saudi tension, and other Middle Eastern, and probably Russian crises can cause greater fluctuation on the oil market, though only to a limited extent. The fact that Iran, one of the world’s biggest extractor, might return to the market, significantly restricts the scope of price increases. China’s decreasing need for raw materials and energy-carriers also hinders further increase. To sum it up: oil prices will stay under pressure, and we do not expect them to rise.

Lately, I heard investors were quite positive about noble metals: it is said, this year, it is going to be worth investing in gold and silver again.
I agree; gold seems like a good investment if we ‘start’ from euro. The price of noble metals will hardly increase against the dollar, however, those, who buy gold for euro, will achieve a certain extent of increase in value.

Does it mean, you are expecting the dollar to get stronger?
I cannot exclude its further strengthening against the euro, though it would not be advantageous for the world economy. However, if this exchange rate persists, the dollar will still be strong. The reason why it is not likely that the dollar will become weaker, while the euro stronger – even though, some economists and investors believe the opposite – is that while Fed will definitely be tighter, ECB will issue further quantitative easing.

The year started off with China and its issues. Should we be worried for China?
The concerns are not unfounded, but I think, markets simply overreacted the weakening of yuan, and the news that forecast a slower growth rate of the Chinese economy.
The essence of this ‘story’ is that the leaders in Beijing acted immediately: they pumped billions of dollars into the stock market in order to stop its plummeting. It served as another example that their crisis management is safe, consistent and responsible. For me, official Chinese forecasts and communications are getting more and more relevant. We were not disappointed in them in the past years. So the recent prognosis from Beijing, which says that this year, the Chinese economy can achieve a growth rate above 6 percent again, can be realistic. Of course, it does not mean that things will settle down: China has always been surrounded by numerous factors that can affect the market.
However, it is a fact that the weakening of the yuan will lead to panic amongst China’s competitors, especially those emerging economies, which make profit from their export to China. For them, sustaining this competitiveness, keeping inflation under control, and achieving higher economic growth rates are essential social matters.

Original date of Hungarian publication: January 7, 2016