Templeton's US$42b manager says the gloom has gone too far

JAN 22, 201611:26 AM

[TOKYO] Heather Arnold spends all day assessing the prospects for the world's economies and their stock markets, and doesn't see too much to worry about.

China - the epicenter of market turmoil that's reverberated around the world - is in a natural growth transition, and neither the nation's yuan policy nor its slumping equities should be a big concern to global investors, says the director of research at Templeton Global Advisors Ltd. Low oil prices will be cured by, well, low oil prices, as production is cut in the US while demand steadily climbs. Arnold is buying more shares.

"The depth of pessimism that's out there seems unwarranted," said MS Arnold, who also oversees about US$42 billion as a fund manager at Templeton, on a visit to Tokyo this week. This is "ultimately for us a good thing."

Global equities erased about US$7.7 trillion in value this year as the slowdown in China and rout in crude weigh on sentiment. Stocks in Shanghai, Tokyo and Europe are in bear markets, a measure of commodities is near an all-time low, and the yen jumped as investors sought havens, while others moved to cash.

MS Arnold sees Europe as the cheapest market, using measures including cyclically adjusted price to earnings. It's the area where they're most overweight, she said. The next-best opportunities are in emerging market shares, particularly Asian financial companies, MS Arnold said.

The Templeton Growth Fund, the largest of 16 funds she helps manage with US$14.1 billion in assets, has lost 11 per cent this year, according to data compiled by Bloomberg. The US$6.4 billion Templeton Foreign Fund is down 13 per cent. While Arnold's calm about the rout, she says she's far from complacent.

"Relaxed is probably an overstatement," she said. "When you're managing people's money, you're ever vigilant, because you do look at what's going on and try as best you can to say, is there new news in this? But when we look out, we're still very optimistic." On China, she says the equity market is going through teething pains and it doesn't say much about the underlying economy. Local investors were overexcited from the middle of 2014 and shares went too high, and now they're too pessimistic, she said. The Shanghai Composite Index surged 151 per cent from July 2014 to a peak last June. It's since dropped 44 per cent.

For MS Arnold, China's slower expansion as it shifts to a services-oriented economy is a normal transition, albeit one made more volatile by high levels of debt. Her view contrasts with billionaire investor George Soros, who said on Thursday that the world's second-biggest economy is facing a hard landing that will contribute to global deflationary pressures, prompting him to wager against US stocks.

Fears that China's weakening of the yuan is an act of competitive devaluation are off the mark, according to MS Arnold. The yuan dropped 1.5 per cent in the first week of January, fueling concern about policy intentions. In Davos this week, China's vice president underlined the Communist leadership's pledge to avoid pursuing devaluation.

"This is more taking pressure off a currency that was continuing to move ever higher as their economy was weakening," she said.

At the heart of the worldwide stock rout this year has been oil, which plunged to its lowest level in 12 years. Crude markets could "drown in oversupply," sending prices even lower, according to the International Energy Agency, which trimmed its 2016 estimates of global demand for the commodity this week. This too will pass, according to Ms Arnold, who says demand for oil is quite price-sensitive, while growth in supply will probably slow this year as the US and other non-OPEC countries scale back production.

"The lower it falls, the more the rest of us decide to drive," she said. "This is a self-correcting problem."

Ms Arnold is underweight US stocks. While the market is "fully valued," the economy has room to expand, she said. Growth will be driven by the consumer, she said, even as companies face headwinds such as rising wages and dollar strength.

Not everything seems rosy for Ms Arnold. Like China, developed economies have too much debt after the financial crisis, and the recovery will be slow.

"We should expect growth to remain quite anemic wherever we look, but that doesn't mean we're about to fall off a cliff," she said. "Whenever we see lots and lots of skepticism and fear and loathing in markets, that's never historically been signs of a top."

BLOOMBERG