NorthCoast CIO sits down with Investor’s Business Daily to discuss global trends in the marketplace. Click here for a drop-down of the highlights --
After pulling back in July, HYG has seen an impressive recovery in August. What do you attribute the recovery to and do you see additional catalysts that can keep this holding moving upwards?
- Stabilization of situation in Russia
- Lower default rates
- Improving economic backdrop
- Fed less hawkish than expected, producing lower government yields
We also witnesses renewed flows, pushing yields and spreads lower, but still not at the lowest levels yet: Currently 392 versus 365 low-point in June.
The S&P set another all-time high on Thursday. What do you think could challenge this rally in the months ahead?
Our market outlook is guided by more than 40 indicators in 4 dimensions: macroeconomic, sentiment, technical and valuation. The first three categories display positive readings, while the fourth, valuation, is in negative territory. One out of four is not concerning but invites caution. The easy gains are most likely behind us. We have seen this scenario before and are a little more cautious, increasing allocation to cash or less aggressive holdings. While there can always be an unpredictable event, such as Russia/Ukraine, or even Israel/Hamas, we believe the most likely are the un-excepted moves of the Federal Reserve. However, Fed chair Janet Yellen has been very transparent and sent the message that while rates are to remain low, there will be a period of normalization. That’s the main concern we have identified on the horizon
Do you expect the European Central Bank (ECB) to do more to spark European economic growth in the near future?
Asking the ECB to spark economic growth in the near future is asking a lot - there are so many factors getting in the economy and monetary policy is just one of them. The ECB is lacking the political backing of the European governments to conduct a more aggressive quantitative easing. More important still is for Europe to undergo structural reforms and start freeing the economy from rigid labor laws, over-regulation and an excessive tax system. But that’s the long term picture. And it seems that France could follow that path with a new government with more liberal inclinations. So, in the short term, we are left with the ECB and the recent developments in France could increase commitment for a QE, and create expectations momentum which is needed to feed the inflation cycle.
What do you see as needed for the recent rally in Japanese equities to be sustainable long-term?
Japan has been relying on the Abenomics ‘ 3 arrows:
- Short-term: An aggressive QE targeting 2% inflation to support 2% GDP growth
- Short-term: Stimulating government spending by increasing budget deficit
- Long-term goal: Structural reforms to stimulate private sector led-growth
Government has shown decisiveness and renewed commitment and results have been mildly encouraging. But it’s a start to reverse a very negative long-term trend. Since April 30th, EWJ has appreciated 8.2% versus IVV 7% and IEV down 2.7%. Over that time period the Japan consumer confidence index has also increased to 41
What is one aspect of IJH that you find to be particularly appealing?
IJH is mid-cap US ETF and we are actually a bit underweight to this portion of the market versus the respective indices we are managing in our ETF retirement portfolios, as we are for most US equities. This positioning is resulting from the previous comments - US valuations are a bit stretched and we see better opportunities in other market segments.
Are there any messages about your investment approach or specific holdings you want us to convey to readers this month?
Models are fact based and well adapted to several types of environments. They were able to see in July that while more volatile period, some holdings fundamentals did not deteriorate and were actually more attractive: HYG spread stood at 450, we stayed invested and recovered fully, claiming new highs.