Last night chartered financial analysts gathered in downtown Toronto for what is now the big event on the social calendar for the fund management business--the 57th CFA Institute of Toronto's annual "Fearless Forecast" dinner.
Each year the CFA Society Toronto brings in some top-notch talent for the event. The night is a wonderful agglomeration of ideas, forecasts and predictions of all things economic. The content is not dumbed down. The analysis and thinking is top-notch.
Before the dinner, in conversation with a credit analyst for one of the major banks, the conversant noted the remarkable amount of change going on internally at the major banks. Dodd Frank is coming in. The credit crunch of 2008 has been absorbed. "The lesson has been learned," he said.
The first of the celubutant financiers was Russ Koesterich, managing director and chief investment strategist at BlackRock. He suggested that while rates might be a bit higher by the end of the year, they will not be qualitatively higher. Since the recession pension funds have been locking in liabilities. This is why bond prices are high—there is far more demand for bonds than there are issues. The developed western countries, while slightly "deleveraged", still have a debt problem. Growth will be slow. The long-term trends negatively affecting growth--demographics, lack of wage growth--will still be with us. There is a "speed limit" on how fast economies can grow. "Long term rates will be higher, but not much higher," said Koesterich. He is not bullish on equities, "but we are not at the peak of the market...equities are still cheaper than bonds in a world of low yields...choose your bonds wisely." By June the Fed will begin to raise rates.
Up after Russ, Charles Brandes, a CFA and founder and chairman of Brandes Investment Partners. The principal of the famed value-investment firm played a snippet of tape that captured a great quote from founder of the CFA designation, famed value investor Benjamin Graham. His comment was philosophic on the nature of markets: “Everybody in Wall St. is so smart that their brilliance offsets each other. And that whatever they know is already reflected in the level of stock ... what happens in the future represents what they don't know."
According to Brandes equities in North America are fully valued. Europe and emerging markets will outperform in the years ahead. The recent trend toward passive investments has run so far there will be a gradual return to active management over the next five years. Equities will outperform bonds by the widest margin in history for the next 30 years. Utilizing slides relating current (high) price-earnings ratios, he was philosophical himself, "We believe in reversion to the mean over time."
The third speaker of the night Christian Stracke, the managing director and global head of credit research PIMCO, sparked a round of laughter when he said, ``It`s great to be here in Toronto...and out of the office." (A nod to the recent news about PIMCO head Bill Gross leaving the firm). Getting to things serious he noted that, "Things are not about to blow." That is, the bearish talk that has become so common since the "week after Lehman Brothers collapsed" in the Great Recession doesn’t get the big story (commenting on the psychology of current market commentators he noted, that "you sound cooler when you’re bearish…but that this misses what other smart people are saying…” So true). He suggested there will be phenomenal changes at European banks that can borrow at 0% in the year to come. In Japan, the new central bank governor, Haruhiko Kuroda, has promised 2% inflation by Q2 of the year to come. If that doesn't happen, expect new and radical and fascinating quantitative means of easing among Japanese banks. The geo-political tension on the front page of newspapers is not going to be a big deal, "These issues have been with us for a long time." Coal prices will come down as Chinese economic growth slows ("...the slowdown in China is a real issue."). But the system will survive. There is "just not as much leverage as there was" in the system. Basel II regulations are having a real effect. "Things are not going to blow up. That may happen at some point in the future. But not soon." In humours aside, he noted, we're smart. We’ll figure out a way to get around the regulations." But like the others, he suggested yields will not be much higher. With "the right active management" some will eke out a little extra. But overall, yields will be lower." Which is not what your clients want to hear" but is, nevertheless, the fact. Tk used the phrase the "New Neutral" to describe the long-term trend toward lower, slower growth in developed economies. He advised managers to be wary of the current radical amounts of debt being issued. "Working at PIMCO, we see everything that comes to market. Thirty or forty percent of the issues coming to market right now, you do not want to be involved with." His prediction was that "we'll see more of the same" and that the Tim Horton’s tax inversion--and it was a tax inversion "Warren Buffet was lying when he said it wasn't"--will be the first of more to come. Canada isn't Ireland when it comes to corporate tax rates. But rates are lower here than in the U.S. and that trend will continue.