We had an opportunity June 28 to listen to Dennis Stattman, senior portfolio manager of the Blackrock Global Allocation Fund, discuss global investment conditions. His quarterly market assessment is interesting because he and his team of analysts manage a go-anywhere fund that can invest in just about any type of security around the world. They continually monitor the relative attraction of not only stocks vs. bonds or U.S. vs. international but other alternatives and all the underlying slices of global markets.
Their insight provides broader perspective than a money manager who is focused on a single asset class.
Some observations that we thought were noteworthy:
- Stattman cited Department of Labor data indicating that 1 out of 6 Americans can’t get as much work as they want. This combines the unemployed with the underemployed or those who have accepted jobs at lesser salaries than they are qualified for. This makes him cautious of the ability for corporations to continue expanding record profits as they have while operating very lean over the past couple years.
- While his view of company profits is tempered, he still views stocks as a better current value than bonds. When looking forward to 2012 company earnings expectations, stocks in the S&P 500 are trading at “undemanding valuations” — an S&P 500 price/earnings ratio of about 12. Stattman said that of the 50 largest companies in the U.S., only six are trading at a P/E ratio above 15, which would historically suggest that they were beginning to become expensive relative to their earnings.
- Even with valuations that appear attractive, Stattman and his team are not tremendously enthused about stocks. They represent “the best house in a bad neighborhood but the neighborhood is getting worse.” There are many economic headwinds to face but he doesn’t view government bonds as a worthwhile way to protect against risks. With interest rates remaining very low and a 10-year government bond paying about 3%, Stattman suggests that if you were to apply a stock-like price/earnings ratio to the 10-year Treasury it would be 33, essentially much more expensive than a high-quality, dividend-paying stock.
- Stattman is overweight energy and natural resources largely because of vehicle sales in emerging markets, primarily China. He cited data indicating that 50,000 vehicles are sold every day in China. That compares to a rate of close to 35,000 in the U.S. over the past year. The percentage of global vehicle sales is rising swiftly in emerging markets where a great portion of the population is moving to middle class with disposable income. In 2001, of 55 million vehicles sold worldwide, 15 million were sold in emerging market countries. In 2010, of 74 million vehicles sold worldwide, 42 million were wold in emerging market countries. Stattman’s conclusion is that this equates to significant increases in oil usage therefore an overweight to oil/energy companies.
- Stattman said that if China and India can elevate one quarter of their population into the “consumer class” it would double the size of the global consumer class. It would also increase the global investment market participation of what are currently viewed as emerging markets. Despite all its economic growth, China is still considered an emerging market.
- Back to the U.S., Stattman touched on the country’s debt and potential for significant future challenges. If you compare the government’s income and expenses to a household, Stattman says it would be as if a household had income of $100,000 annually but spend $160,000. This is unsustainable and entitlement programs (Social Security and Medicare) are making the matter worse right now, not in the future when they are projected to be essentially insolvent. The current situation assumes that the government can borrow and spend at low interest rates forever but the lifeline on this behavior is running short.
- The U.S. dollar has not been tied to the gold standard for nearly 40 years but when measuring the value of the dollar compared to gold, the dollar has lost 98% of its purchasing power over the past century. Therefore, Stattman believes that if you want to improve wealth in real terms, you have to own at least some real assets.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA