9/21/98 Forbes. Reports from the trenches [Positive TBR references]
global.forbes.com
Get out? Stay in? Buy on dips? FORBES GLOBAL reporters asked managers of some of
the best global debt and equity funds how they
see markets moving in the months ahead.
By Elizabeth A. Amery and Justin Doebele
Arthur Byrnes, New York
Deltec Latin American Fund (high-yield
bonds):
"It is not 1929. The U.S. and Europe are in far
too good a shape to be at that level of risk. The
recent strengthening of the yen takes some
pressure off Asia. But there isn't going to be a
snapback like 1987 because Japan and Russia
first need to be fixed, and they need more than
bandaids. The 500-point drop [on Wall Street]
was a way to bring the market back in line with
the rest of the world. An interest-rate cut is
already in the market. There has to be some
more unwinding of leverage, which is maybe
80% complete. We are near a bottom-the
Dow Jones will hit 7200. We will test that level
in six to eight weeks, if not sooner.
"Russia and Latin America are way oversold,
even if the Dow goes to 7200. Russian stocks
are penny options on the country's continued
existence. In Latin America, this is a perfect
opportunity to get rid of your third-tier
companies. Why own the squirrelly-stuff when
you can own a Telmex or Telebras [at cheap
prices]?"
Carlos Gadala-Maria, Miami
JPBT DMA Fund (short-term bonds):
"You will need a strong stomach, but Latin
America still looks attractive in both bond and in
stock markets, where valuations are very, very
good. [As a defensive move] I have raised my
fund's cash position to 10%, up from the normal
1% to 3%. That's still less than during the
Mexico peso crisis, when I was between 15%
and 20%. The region has grown up a lot since
then. Right now I'm buying one- or two-year
dollar-denominated Mexican paper. The prices
more than compensate for the risk. I think
Mexico has the best capacity to repay dollar
debt in the region, and has probably the best
managed economy in Latin America today. Yet
[the one- and two-year paper] I'm buying is
paying 800 to 900 basis points over
[comparable] Treasurys.
"I'm not buying Brazil, but I'm also not selling it.
They have the type of fiscal deficit that got
Russia into trouble. The government has pledged
to cut it. I'm confident that [President Fernando
Henrique] Cardoso will be reelected [in
October]. When that happens, he will have four
years to address the deficit issue. I would
probably take [his reelection] as a buying
opportunity."
Charlotte Schmid Stary, Zurich
Credit Suisse Equity Fund Pharma
(specialty stocks):
"This is different from 1929 and 1987. I don't
think we're in a bear market, I just think this is a
temporary correction. The fundamentals are
basically good, interest rates are low, and there
is still growth in the market. I reduced the
liquidity in the fund. Short-term it's hard to know
if there might be higher volatility, but longer term
I think this is a good buying opportunity. I have
increased positions in companies like American
Home Products, Merck, Pfizer and Medtronic,
just big blue chips. The sentiment in the smaller
and mid-caps is still kind of shaky.
"I'm now fully invested. What is always a danger
is that when the market has a serious correction,
individual investors and even institutional
investors lose their nerve, but I think drug stocks
are a good defensive investment to be in. I
haven't sold anything but if there are redemptions
I will have to. I'll look to decrease holdings in
companies with less visibility and with fewer
products."
John Horseman, London
GAM Universal DM and US$ Fund
(balanced):
"I view the recent declines as profit-taking rather
than evidence of fundamental change. But there
are a few long-term concerns.
"The first is that U.S. interest rates are out of
sync with the economy and corporate earnings.
The market would actually welcome signs of
economic weakness because that would hasten
an interest-rate cut, which is necessary. The risk
is that if the economy stays strong, the Fed will
do nothing. As a result I have decreased holdings
in U.S. brokerage firms.
"Another concern is that the domestic recession
in Japan is starting to affect exporters' earnings. I
have been selling Japanese electrical exporting
stocks.
"GAM doesn't think this situation is similar to
1987, when bonds fell before equities did
because of anticipated inflationary pressures.
There were then declines in equities, followed by
lowered interest rates. Today, bonds are firm.
Real interest rates are unsustainably high and
should come down."
Diego Espinosa, New York
Scudder Strategic Global Themes Fund
(stocks):
"We're in a period of global deflation and
intensifying price competition. We've been
focused on Europe because we think the
European companies have the most potential for
restructuring and cost-cutting. It's companies that
have cost-cutting ahead of them, rather than
behind them, that will weather price competition.
There hasn't been much demand growth in
developed markets. The growth in earnings
you've seen has come from restructuring rather
than volume growth. [But] since we've already
been through the greatest period of restructuring
in the 1980s and 1990s, it's more difficult for
companies to maintain margins in the face of
price competition.
"We've basically been invested for the past 12
months in anticipation of this instability and
volatility. We actually haven't been doing much
as a result of the recent volatility because we
were positioned for it to begin with."
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From September 21, 1998 Issue
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