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In 2015, the global markets were volatile, but essentially flat. We think 2016 will also be a volatile year, but we’re excited about all the opportunities to invest that we see outside of the United States.
Alger International Growth Strategy Portfolio Manager Pedro Marcal gives an up to date outlook on the strategy.
Pedro Marcal: In 2015, the global markets were essentially flat but very volatile and that would be through the end of November 30th. The U.S. up slightly, EAFE down about two percent in dollar terms and emerging markets down in low double digits. So it’s been a volatile ride, and should we be surprised by it? Not particularly. When we think about what happened in January with the move in the Swiss franc, the Swiss Central Bank essentially removed the cap that they had with regard to the euro, which essentially allowed the Swiss franc to appreciate untethering it from the euro. And they wanted to do that prior to the beginning of quantitative easing in the Eurozone. The European Central Bank, just began this process of quantitative easing, ironically close to the time when now we see the U.S. Federal Reserve ending it.
We also saw a showdown or brinksmanship between Greece and the eurozone with the new Greek government coming in this year. And, of course, we can’t forget what happened in August with the move by the Chinese government to change the mechanism by which the renminbi – essentially the Chinese currency – sets its prices versus the dollar and other currencies in preparation for the renminbi’s inclusion into the IMF reserve currency SDR basket, which we actually have seen happen, but that essentially untethered the renminbi from the U.S. dollar prior to what we now hopefully will see at some time in the near future, an increase by the fed of interest rates here in the United States, which we believe will continue to strengthen the dollar. And much anticipated, haven’t seen it yet.
China going into the IMF SDR basket in the short-term won't have a very big effect. But longer-term it’s a very big and important thing. The IMF SDR basket of reserve currencies have essentially held four currencies: the U.S. dollar, the euro, the yen and the British pound. And now China, which is a huge trading partner of everybody around the world – the renminbi will become part of that basket. It will be very interesting to see whether that happens at the end of this year or the beginning of 2016.
So our outlook for 2016 and 2017 is really more of the same and that’s good for stock pickers. So there will be volatility and companies based on fundamentals we think are going to do very well and we’ll be able to identify them and invest them based on positive dynamic change.
We expect the main drivers in 2016 to be a stable U.S. economy and a strong U.S. dollar relative to most international currencies, particularly the euro and the yen, and remember, we’re ending QE here while the Japanese are sort of deep in the process of QE, but still in fairly early stages, having only done this for a few years and the eurozone just beginning. We believe there will be a continuation of low energy and commodity prices, which will help consumers globally, particularly in Europe and Japan.
Eurozone economic recovery will be aided by a weaker euro, and Japanese economic growth is being helped by improved corporate profits, some of the structural reforms that are starting to take hold, lower energy prices and, of course, the weaker yen.
Our main macro themes in the portfolio for 2016 were investing in European exporters. We own luxury car companies in Europe that export outside of the eurozone, so they benefit from the weaker euro. We own semiconductor companies that are also selling in dollars globally and they benefit from the weaker euro because obviously a lot of their cost base is in euros. In Japan, we’re buying Japanese exporters.
In both Europe and Japan, we own the beneficiaries of the rising domestic prices we’re expecting and sort of this loose monetary policy so we own companies that are in the real estate business, both in Japan and Germany.
From a sector point of view in 2016, I’m going to talk about three broad categories; innovation, transformation and disruption.
Innovation. We’re finding a lot of innovation around the world. Let’s take immunotherapy successes. We found companies that we can invest in where they are essentially providing drugs and drug delivery systems that can desensitize the immunity system for something like a peanut allergy or a milk allergy.
And there are companies that have developed drugs that help re-sensitize and focus the immunity system on combating disease and we see that in cancer, would be an example.
We’re also excited about things that we’re seeing in 3D printing, particularly in metal manufacturing. There’s a lot of innovation there.
And let’s touch on carbon fibers. Purified carbon, you can take a strand of something about the size of a strand of hair and support almost a thousand pounds with it. So if you’re making a luxury car and you want to make the car lighter for gas mileage and stronger, you can find a way of putting it in a car, or if you’re making an airplane, it’s lighter, and it flies better and it’s stronger. So it’s just a great material.
Let’s talk about transformation. So there are a couple different types of transformation. There are many companies changing their management teams. Another is mergers. There are many companies that are buying other companies. One of the great things about investing outside of the United States is many countries, particularly in Europe, have lower tax rates. So they can come and they can buy U.S. companies or they can buy companies all over the world where there’s much more value for the shareholders if they’re managed out of the headquarters in Europe.
And finally, industry consolidation. We’re very excited about companies that are rolling up, for example, the equipment market – a very fragmented market. Or when you think about the broadband cable business throughout Europe, there are a lot of opportunities where you can buy companies that are consolidating and rolling out new products and benefitting from scale there.
So let’s talk about disruption. There’s so much disruption in the world. We own a number of companies outside of the U.S. that are benefitting from that are benefitting from disruption of the whole new media, digital media versus old media and digital advertising. There are companies outside of the United States involved in search. We own a company in China that is also involved in doing that.
So we’re seeing a huge amount of change and a number of companies that are benefitting from dynamic change. And so from our point of view, from a fundamental, bottom-up, stock picking point of view, we’re very optimistic about when we look forward into 2016 and ’17 that we see a lot of opportunities. And we think it will be a volatile year in 2016, but we’re very excited about all the opportunities to invest that we see outside of the United States.
The views expressed are the views of Fred Alger Management, Inc. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities.
Investing in the stock market involves gains and losses and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as the price of growth stocks tends to be higher in relation to their companies´ earnings and may be more sensitive to market, political and economic developments. Special risks associated with investments in emerging country issuers include exposure to currency fluctuations, less liquidity, less developed or less efficient trading markets, lack of comprehensive company information, political instability and different auditing and legal standards. Foreign currencies are subject to risks caused by inflation, interest rates, budget deficits and low savings rates, political factors and government controls. Some of the countries may have restrictions that could limit the access to investment opportunities. The securities of issuers located in emerging markets can be more volatile and less liquid than those of issuers in more mature economies. Investing in emerging markets involves higher levels of risk, including increased currency, information, liquidity, market, political and valuation risks, and may not be suitable for all investors.
Founded in 1964, Fred Alger Management Inc. provides investment advisory services to institutional and individual investors through traditional and alternative strategies in a variety of products, including separate accounts, mutual funds and privately offered investment vehicles. For more information, please visit www.alger.com.