Jeffrey Morrison is an institutional portfolio manager, who joined MFS Investment Management in 2006 and has 22 years of experience in the industry as an equity portfolio manager, capital markets analyst and trader. Boston-based MFS manages around $240 billion in assets globally, 11% of which is sourced from the Asia-Pacific region.
Morrison spoke to AsianInvestor during a trip to Hong Kong last week.
What is your main concern about potential risks to the global economy?
One of the main downside risks for the global economy is that of possible over-tightening by emerging-market central banks. For example, the People’s Bank of China [on July 6] announced a 25-basis-point hike in the 12-month lending rate, from 6.31% to 6.56%.
Given [the relatively loose] US monetary policy, central banks – particularly the ones most closely linked to the dollar – are trying to slow their economies and get inflation under control without putting upward pressure on their currencies. So we think emerging-market central banks will tolerate inflation rates at the higher end of the range until we start to see the Fed [US Federal Reserve] tighten.
But this is a continuing balancing act. In Brazil, for example, we will see continued credit curbs and capital controls. Still, we don’t think [EM central banks] will over-tighten but it’s always a risk.
Do you have any specific comment on China inflation?
The momentum of inflation in China is starting to top out and should peak in the third quarter, driven by more subdued energy and food prices. That will prompt the People’s Bank of China to start to pull back a little in terms of tightening. Any chance they get to take their foot off the brake will be positive for equity markets in general.
How about the problems in developed markets?
The US economic situation remains precarious, with high unemployment, sub-par personal-income and consumption growth and renewed weakness in the housing market. Hence, in the developed world there is a stop-start sub-par recovery that is dependent on emerging-world growth.
While we expect the global expansion to be sustained – albeit at a sub-par level – there are a number of risks that could tip the global economy into recession: energy prices going sustainably higher, unemployment rising further in the US, the European central bank choking off growth – to name just a few.
So how is MFS positioned in terms of portfolios?
The global environment, in its third year of recovery, is one that favours fund managers that focus on high-quality, growth-orientated, larger-cap and dividend-paying stocks. Central banks tightening in emerging markets and in some developed markets is a situation that plays to the strengths of those kinds of companies.
We are known as a quality shop, and that quality aspect will always be there, but those dynamics are playing particularly well for us at moment.
From a tactical perspective, developed markets look more attractive than emerging markets now – price levels and inflation environments in emerging markets means p/e multiples will be under pressure, says Morrison. That said, EMs are in a secular bull market, and their outlook in terms of potential growth is still far superior to that for DMs, he argues.
How about your overall view on sectors?
In terms of sectors, globally, energy and resources stocks tend to do well in the later stages of a recovery. Recently defensives such as staples and healthcare have done well, but they are topping out now and we expect them to trade places with resources, materials and some tech and industrial names. In the short term, rotation is likely back towards more cyclical sectors.
Late-cycle sectors – industrials, energy, basic materials – benefit from infrastructure-driven growth in Asia, and there’s likely to be back-and-forth rotation between late cycle and early contraction sectors (staples, healthcare, utilities, telecoms) given the stop-and-start global economic expansion.
What comment would you make on the debt-ceiling and potential default concerns in the US?
There’s a lot of rhetoric around the US debt ceiling, but we expect a deal to be made close to the deadline. They will likely wait until the last second to get a deal done.
Regardless of that, the US government takes in 10 times as much in receipts as it needs to pay interest on its debt. [US treasury secretary Tim] Geithner can move deckchairs around and there’ll be no default – so it’s a bit of a ‘cry wolf’ situation.
Yes it’s an important issue, but I don’t think there will be a default.
What’s your view on Japanese equities at present?
Even before the earthquake, valuations were becoming much more attractive in Japan, then the event caused a pretty significant downdraft in Japan. There remain a lot of negatives [in the Japanese market], such as the high debt levels, and poor demographics, but there are a number of positives as well. So we were and are finding opportunities on a company-by-company basis.
The economy there might drop off a cliff for a few quarters, but then the recovery will be a boost to growth for several quarters into next year – thanks to boosts to construction, recovering manufacturing etcetera, as recent data shows.