“Forget the headlines,” says Robert Manning, chairman and CEO of MFS Investment Management. “There are great opportunities out there in US high-quality companies – especially in technology, and especially in dividend-paying IT stocks.”
Delivering his upbeat message at AsianInvestor’s Korea Institutional Investment Forum in Seoul, Boston-based Manning says investors have to accept the West isn’t going to get out of its debt problems any time soon, and move on.
So far the world’s response has been to flee to G3 sovereign bonds, but he argues this is self-defeating. “Another bubble is being created, the biggest bubble of all: the US Treasury bond market.”
Western governments’ strategy of printing money will inevitably lead to inflation and higher interest rates, doing great harm to bondholders. “Buy credit and buy the equity of global companies that pay dividends,” he says.
Manning dismisses Western governments’ ability to get out of their debt problems in the near term. He notes the US and European governments assumed the debts of the private sector, which he says is a disaster.
“Industrial companies and private households know how to restructure and downsize; governments don’t,” he argues. That will keep economic activity and investment returns suppressed, and market volatility high, for years.
The European situation is worse because sovereign debt isn’t actually the problem. The eurozone as a whole, including Germany, has a very manageable level of debt. But it can’t compete because of its inflexible labour force, which prevents companies from downsizing and regaining competitiveness.
Instead of restructuring, governments are resisting reform, or in the case of France, actively adding more rigidity to their labour markets. Germany is stuck paying for all of this, on the back of its own relatively flexible workforce, but its economy is driven by exports. And its exporters have succeeded thanks to the euro. Therefore, Germany is likely to continue to keep the eurozone afloat and prevent a full-blown crisis.
The good news is that, increasingly, the positive news out of the US and China means that investors can learn to forget about eurozone weakness.
Manning acknowledges that China, some day, must reckon with its credit binges and capital misallocation. But its strong monetary position means it can stimulate its way to strong growth, and it remains a driver of consumption and urbanisation. India and Brazil, to lesser degrees, also remain able to cut interest rates, increase demand, and grow.
“The US is the untold story,” Manning says (although not completely untold – see AsianInvestor magazine’s July edition). “Fears of recession are wrong.” He says corporate profits, consumption, housing and automobile manufacturing are all stable, healthy and growing. Housing prices and energy prices are low, corporate balance sheets are strong, and the S&P 500 Index offers good value, at 12.5x current earnings and a 2.2% dividend yield.
Companies continue to raise dividends, merge, buy back stock and make capital expenditures to boost productivity. “The US is the only developed market that is bigger today than it was in 2007,” Manning notes.
Although housing and autos are on the rebound, he likes tech the best. Corporate spending on tech upgrades has been very low. Companies have plenty of cash and their software and hardware is now, on average, six years old.
Tech companies are often global players that can tap into emerging-market consumption. Their valuations have fallen substantially and as a group trade at a discount to the S&P 500 (Manning says average tech P/Es trade at 11x current earnings), with slightly less volatility as well.
“It’s the sweet spot,” he says.