Trader profile: Pendulum swinging away from American assets

Too much of a consensus in favour of the US, given the obvious nature of its recovery, the dovish debut of Federal Reserve chair Janet Yellen and relatively expensive markets.

Michael Kelly, managing director – global head of asset allocation, PineBridge Investments. Courtesy PineBridge Investments

Michael Kelly, managing director – global head of asset allocation, PineBridge Investments

Based: New York

Years investing: 31

What is the asset class and geography you are focused on?

I manage global multi-asset portfolios which span across equities, fixed income, currencies, commodities and alternatives.

What is your outlook for the coming months? What should investors look for?

After several years tilting towards US-centric portfolios, we have begun steering more funds towards Europe and also maintain a large exposure to Japan. We see too much of a consensus now in favour of the US, given the obvious nature of its recovery, the dovish debut of Federal Reserve chair Janet Yellen and relatively expensive markets. Meanwhile, the Fed’s quantitative easing is likely to end on schedule just as fundamental improvement shows up, creating somewhat of a stand-off for the markets in 2014. In contrast, Europe and Japan have far more operating leverage and valuation support. We see the European Central Bank initiating unconventional monetary policy this summer, while Japan extends theirs for another year some time this autumn.

Japan is most interesting because the consensus expectation among investors is for a repeat of 1997, when Japan last instituted a consumption tax increase. This was followed by an outbreak of deflation. We believe that Japan’s deflation in the late 1990s and early 2000s was due to the outbreak of the 1997 Asian financial crisis and the onset of China’s regional deflationary pressures, not due to Japan’s consumption tax. Unlike then, Japan’s employment situation and operating capacity are actually tightening going into this consumption tax increase, China is on the road towards ending its over-investment which should alleviate deflationary pressures, and Japan is in the midst of a quantitative easing programme this time.

While Japan’s recovery is likely to pause for a few months following the recent consumption tax hike, we believe there will be a resumption in price increases, output, as well as an extension of the Bank Of Japan’s quantitative easing, and consequently a very strong finish to the year for the Topix.

What are the main risks, either upside or downside, to the outlook?

We currently have a constructive view on growth assets over the medium term and therefore find ourselves focused more on downside risks. The top two are further deceleration in China’s economic growth, driven by a peak in the residential real estate market and geopolitical risk stemming from the Russia-Ukraine crisis.

What was the best investment you were ever involved in?

Our asset allocation team heeds Warren Buffett’s advice that “to finish first, first you must finish”. We pride ourselves on protecting on the downside, and in 2008 we did just that and ensured that our portfolios withstood a very harsh environment. We shed most risk assets and sat through the year on very long-duration, high-quality US treasuries or 20-year Libor swaps.

What was the worst?

In the late 1990s, I developed a much keener appreciation of Keynes’s quip “the market can stay irrational longer than you can stay solvent”, by shifting to value stocks 18 months too early. Today we combine valuation insights with a view of how fundamentals will unfold over the next nine to 18 months.

Follow us on Twitter @Ind_Insights