Investors need to look at the balance between the current uncertainty and the opportunity amidst heightened geopolitical risks, said Brain Jacobsen, Chief Portfolio Strategist at the Wells Fargo Advantage Funds. It’s all about knowing the risks that are out there and whether investors are being compensated for them.
A lot of current risks are being driven by the situation between Russia and Ukraine and the dangers in the financial markets are mainly driven by geopolitics. The Federal Reserve hiking rates sooner than anticipated is not a big issue and really is a “tempest in a teapot.”
Investors should just ride-out short-term volatility and look to buy on the dips, he added. Asked why he thinks the votes of 2015 will be important and not Mr. Plosser or Mr. Fischer, who, perhaps speak more than other members, Brian said among the current voting members of the Federal Open Market Committee, there are two hawks who are squawking quite a bit.
Investors would be wise to ignore them because they are not going to be voting members when it actually comes for the Fed to begin raising rates. The Federal Reserve is likely to begin raising rates in the middle of 2015 and the most vocal opponents against raising rates aren’t going to have much of a voice when it actually comes to doing so, he explained.
Asked if there is a big shift in his asset allocation strategy in a risk-on /risk-off environment as the fourth-quarter approaches, Brian said since November last year, Wells Fargo Advantage Fund’s investment strategy has remained unchanged. He is encouraging people to look at emerging markets and Europe, and allocate more funds there.
While Mario Draghi has been talking about a weaker euro in an attempt to promote growth in the euro-zone, he will actually see some of the fruits of that labor come September or October, when the European Central Bank begins the targeted Long-Term Refinancing Operation and the banks start to clear their stress-tests.
That should lead the banks to stop being such a drag on growth to actually contributing to economic growth to Europe. So investors should look at emerging markets and look at Europe for that little bit of an accelerating growth, he noted.
Asked to explain investors’ biggest concern right now, Brian said right now the biggest concern for investors is the fallout of a rate hike by the Federal Reserve. Investors witnessed what happened in May last year when Chairman Bernanke announced tapering and how there was a sellout in the fixed-income market, creating some volatility.
A lot of people seem to be concerned about that happening again when the Fed starts to raise interest rates some time in May 2015. However, investors should not worry much as it’s a known risk. Often times when an event is widely known and the Fed is very transparent, it’s probably already priced into the markets. So it’s probably best not to worry so much about that as it is to worry about whether investors are actually on target for their longer-term financial goals, he observed.
Asked which of the emerging markets look attractive, Brian said he prefers emerging markets over developed markets mainly because there are better valuation opportunities although there are some attendant risks.
Emerging Europe right now looks appealing, because it has been beaten down so badly due to the problems between Russia and Ukraine that valuations look extremely attractive. There is likely to be a resolution to the situation over the next few months, not necessarily a resolution that everybody likes, but probably there will be a market move up as it become clear there is no more violence coming.
Also, at the other part of the globe; emerging Asia, including India has some tremendous upside possibilities. China and India seem to managing their economy amid the slowdown quite well. So, both emerging Asia and emerging Europe are looking attractive, he observed.
Last year China rattled many investors’ nerve, but the latest credit report from that country looks quite encouraging, indicating Beijing is ready to tackle the credit issue. Asked if he feels a lot more confident, Brian answered in affirmative.
A lot of people since 2012 have been worried whether or not there’s going to be a real-estate bubble bursting, or whether or not there’s going to be a debt crisis with the amount of bad loans on the banks’ balance-sheets.
There have been clear indicators that the Chinese central govt. was trying to mop-up that mess before it became some sort of a catastrophe. One of the benefits of a centrally planned economy is that they can marshal resources to where they want it to go.
Right now, they want to navigate the slowdown in credit growth, and they are likely to be able to do so, complementing it with some targeted stimulus. So, there’s a good opportunity for investors to buy Chinese stocks that they think are on sale, he concluded.
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