Overheard at Morningstar: Trump and markets, China slowdown

AP News
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Posted: Jun 16, 2016 3:09 PM

CHICAGO (AP) — How badly would a Donald Trump presidency shake up markets?

Mutual fund managers are at least considering the question, if not yet making big changes to their portfolios. That, plus other topics of conversation from the Morningstar Investment Conference, where fund managers met with financial advisers to discuss where the best opportunities are and why we should probably get used to lower, and shakier, returns than in prior years:

— The Trump effect

Trump is unpredictable. And, as fund managers say repeatedly, markets don't like uncertainty.

Some investments have already felt a Trump effect: The Mexican peso has weakened so much that it takes 19 to buy one U.S. dollar. That's up from 13 pesos a couple years ago. Several reasons are behind the move, including a retreat by investors from emerging markets. But fund managers say part of it is due to worries that a Trump presidency could hurt the Mexican economy.

The logic goes like this: Trump has called the North American Free Trade Agreement "the worst economic deal in U.S. history" and has repeatedly said Mexico is "killing the U.S. on trade." If he tries to stop U.S. companies from moving jobs to Mexico or to raise barriers to trade between it and the United States, it could hurt Mexico's economy.

And it's not just Mexico that Trump has criticized. If Trump raises tariffs on trade with China and other countries, it could hurt multinational companies, including big U.S. ones. That could mean sharp swings for stocks across industries. Fund managers say they've begun looking at each stock and bond in their portfolios, to see how a Trump presidency could affect them.

"It would have a big impact on equities in general" if Trump wins the presidency, says Jens Peers, chief investment officer of Mirova, an investment manager that focuses on sustainable investments. "What the market does not like is uncertainty. With Hillary Clinton, we know what she stands for. She's been in the White House, she's been in the government. With Donald Trump, we don't know what he stands for. That's the uncertainty."

Even so, many managers say they haven't begun excising all multinational companies from their portfolios or making other big changes. Peers, for example, says he invests in companies that help produce clean drinking water, make diapers for the world's aging population and manufacture cancer drugs. Those demands will still exist, he says, regardless of who wins the White House.

Plus, if Trump won, he would still need to work with Congress to implement new policies, and Congress could serve as a roadblock from proposals that would hurt stocks.

"It's not something we let drive our investment decisions," says Ira Rothberg, portfolio manager at the Hennessy Focus fund. "I don't think it will alter what we think any of our portfolio companies will earn three, four or five years from now. And I think what people say to get elected is oftentimes different from what they implement or try to implement through Congress when they're ultimately in office."

— Emerging markets are cheap, as long as China doesn't blow up.

One of investors' biggest worries is how much China's economy will slow. After growing at an average rate of 9.5 percent from 2000 through 2015, China's economy is set to expand 6.5 percent this year, and economists see it getting only slower.

If China's economy hits a "hard landing" where growth slumps to maybe 2 percent or 3 percent, managers see losses cascading around the emerging-market world. But if China is able to keep its slowdown to a modest, manageable level, some emerging-market investments look like "the opportunity of a decade," says Michael Hasenstab, portfolio manager at the $48 billion Templeton Global Bond fund.

Emerging-market bonds offer much higher yields than their U.S. counterparts, and their currencies could also be set to rise against the dollar, which would mean even bigger returns, Hasenstab says. He has bought Mexican and Brazilian bonds.

He's avoiding longer-term U.S. Treasurys, which investors have bought in hopes of finding safety. Hasenstab considers them risky because a rise in interest rates would make their prices drop, and he sees inflation creeping higher.

Hasenstab, whose Templeton Global Bond fund has lost 3 percent this year, acknowledges that predictions for higher interest rates have been around for years, and they haven't occurred yet. He's undeterred. "What I don't want to do is miss the big move," he says. "I'd rather be early than late."

— Get used to this rocky market

For years, investors enjoyed not only big gains but smooth ones. No longer. Stock and bond markets have veered higher and lower over the past year as worries have flared about China, interest rates and whether the European Union will remain intact.

"It's perfectly normal to have big ups and downs and for the equity market to experience 10 percent moves up and down, even when there's no recession," says Wesley Phoa, portfolio manager with Capital Group, whose American Funds family of mutual funds is one of the industry's largest. It was the last few years of placid returns that were the anomaly.

Phoa and other managers say the volatility actually has an upside: It gives them a chance to buy stocks and bonds at cheaper prices. But a recurring theme among fund managers was that investors need to get used to lower returns, following the big run-up in prices following the financial crisis. It won't be like the years following World War II, where a strong stock market drove investments higher and many workers had access to pensions.

That leaves people saving for retirement with a few options: They can either save more now, work longer or move their investments into higher-risk/higher-reward areas. Each of those carries challenges.