TWST Investing Strategies Report
A money manager says he invests in developed and emerging countries around the world, including the US.
KEITH WALTER is a Senior Portfolio Manager, Global Equities at Julius Baer Investment Management LLC.
TWST: How is the investment climate for your Fund?
Mr. Walter: I think it's an understatement to say the first quarter of 2008 was
a challenging one. We are concerned about the global economic slowdown that's
unfolding and to manage through it, we invest in areas that we believe are going
to be the least impacted by today's global imbalances.
For example, we are underweight the US market because of the housing-related
weakness that we see spilling over to the financial and consumer sectors. We are
also underweight the UK market based on the same home price concerns as well as
the strong British pound which makes trade more challenging. These two markets
are now paying the price for the many years of excessive consumption and
negative savings rates that were the norm. We are also avoiding direct
investment in China because we think that economy has become overheated after
years of double-digit economic growth. While their infrastructure investment
needs are still impressive, the Chinese economy's dependence on exports to the
West coupled with their nascent domestic consumption profile keeps us on the
sidelines.
So where are we investing? Central and Eastern Europe has been an area of
interest for some time and remains so today. We believe that the economic,
political and social benefits these countries are expected to achieve as they
integrate into the European Union should provide our clients with substantial
investment opportunities for years to come. In the near term, this path to
convergence should help this region successfully navigate through a potential
global economic slowdown. We also like that this area is not dependent on US
consumption or Asian investment demand for growth, two bubbles that we think
will prove challenging to investors for the next couple of years. Longer term,
as these countries join the euro currency regime, even more benefits are
expected to emerge.
TWST: When you talk about Asia, are you talking in particular about China?
Mr. Walter: Yes. China was an exciting place to invest over the last few years,
perhaps a little too exciting, as the Shanghai Index was up 98% in 2007, but
through April 9, 2008, was down 35% for the year. Today, the Global Equity Fund
is not heavily invested in China because we think the Chinese economy is over-
heating and needs to become more mature. If domestic demand were a larger
percentage of the total economy today, the Chinese might be able to survive a
slowdown in exports or infrastructure investment. However, without a strong base
of domestic consumption to fall back on, we believe there will be a hard landing
after this summer's Olympics. We took advantage of the Chinese infrastructure
growth story by looking at the peripheral markets that fed this growth.
Materials stocks in Australia and Canada as well as select Japanese exporters
were some of the primary beneficiaries. We anticipate these types of investments
will continue to benefit from China's ongoing infrastructure demand without
directly exposing the Fund to the Chinese economy.
The political environment unfolding in Taiwan is also encouraging. This economy,
which has lagged the rest of Asia, is now playing catch-up on the back of
stronger ties with China. As a result, we increased our exposure to Taiwan in
recent months.
TWST: Why do you think Eastern Europe is pretty much immune to what the rest of
the developed world is experiencing?
Mr. Walter: I'm not sure I would say anyone is immune to the current financial
market turmoil. In fact, Eastern European stocks are also down in 2008 in
sympathy with the global equity market correction. One of the hangover effects
from the subprime loan crisis in the US and Europe is that the cost of funding
for Eastern European banks made it more difficult for them to finance their
growth opportunities. However, these countries are expected to continue looking
westward toward developed Europe, focusing on advancing their economies and
achieving the accompanying higher standard of living. So, while not immune to
today's circumstances, these Eastern European countries are less swayed by
today's global imbalances in Asia and the US, and it is for these reasons that
today we prefer Central and Eastern Europe.
