Stopped at T. Rowe Price's annual investment symposium at the Waterfront Marriott this morning. I only caught an hour, but the plenary panel on the global investment environment was, on the whole, quite positive. The panelists were relieved that the world has stepped away from the economic abyss, surprised at how quickly financial markets have snapped back since March and cautiously optimistic that there's still some upside.
The panelists were Christopher Alderson, CEO of T. Rowe Price International, John Linehan, co-director of U.S. equities and Mary Miller, director of fixed income. Here are some snippets:
The panelists see plenty of investors still waiting to dive in to the markets. "There's still a huge amount of cash on the sidelines," said Linehan. Said Miller: "I'm familiar with one institution that just borrowed $400 million because they could and then called up and said, 'What should we do with it?'"
Miller: "We have had a remarkable recovery this year in the credit markets." The economy is "out of the ICU" and "out of the emergency room" and on "outpatient status." But economic performance is lagging behind the markets, she said, and commercial real estate credit is "still struggling."
Investors are still "hesitant," she said, with lots of money going into conservative short-term bond funds instead of stocks. "There's enormous relief, and that's all to the good. But I think the psychology is still pretty fragile."
Alderson sees short-term interest rates staying low as global central bankers continue extraordinary economic stimulus. But, he said, "it's starting to create problems in other part of the world" as cheap dollar-denominated loans are cranking up asset prices. Recently in Hong Kong, he said, a 1,000-square-foot apartment sold for $12 million -- evidence of a bubble.
Corporate profits are back, but Linehan noted that they're coming largely from cost-cutting, not healthy demand. 70 percent of U.S. companies are beating profit forecasts, he said, but only 30 percent beat revenue forecasts.
Alderson sees more gains possible in all kinds of stocks. "I don't think the market has got ahead of itself," he said. Emerging market stocks sell for 2 times book, about their historical average. Nor are developed-market stocks overpriced on a book-value basis, he said.
Linehan noted the rise in importance of Washington as a force in the markets -- in financial reform, in health-care reform, in enforcing Internet neutrality and in disbursing the billions in stimulus money. He is relatively optimistic about U.S. consumer spending. "A lot has been written about the demise of the U.S. consumer. My sense is, we're probably more resilient than that."
Alderson asked Miller a great question: Give enormous government debt and government borrowing around the world, why should anybody own U.S. treasuries or any other government debt? She gave a sort-of half-hearted answer. "You might always want to have some allocation go government debt as a risk-free asset," even if you make sure to vary maturities and consider inflation bonds such as TIPS, she said. Alderson: "Is it really risk free?"
The panelists were skeptical about gold, which has been setting new records recently. "Gold has symbolic value, but does it really have any economic value?" asked Linehan. "Clearly gold has been bid up in anticipation of inflation." But, he suggested, owning other commodities might be a better hedge against inflation.
And the panelists didn't think inflaiton was much of a near-term problem, anyway, given the huge global excess labor and capital-stock capacity. "It would be difficult for me to imagine an environment with inflation getting out of control," Miller said. The weak dollar, she added, "is a cause of concern, but at the moment it is helping the U.S. economy" by stimulating exports.
Nobody was worried that the dollar will cease to be the global currency of choice. There are no alternatives, they said. The Chinese yuan doesn't trade freely. The euro is managed by countries that have economic troubles of their own and are often in disagreement. Alderson sees a world where the yuan might be the reserve currency -- but not for another decade or two.
Linehan seems to like large-cap stocks relative to small, given the huge run-up that small companies have had.