Opportunities amid icebergs, says 45-year industry vet
- 05 mins 15 secs
Portfolio manager Claudia Huntington has seen a lot of economic cycles in her 45 years of investing. Here, she discusses what excites her in today’s market environment and what gives her cause for concern.
Michael Utley: A lot of political turmoil, global trade disputes, big headlines dominating the markets these days. Given these events, what's your outlook as a U.S. growth investor?
Claudia Huntington: I think about the environment often in sort of a sailing analogy, in that sometimes there's very smooth sailing. Sometimes the ocean's gentle; there's no weather ahead. But to me right now, we're in an environment where we’re sort of in the North Atlantic and there are icebergs out there. And some of the icebergs you can see, and some of the icebergs are mostly underwater.
The icebergs that we can see are very, very high debt levels, certainly in the U.S. — in both government, in business, in consumer — high debt levels relative to whatever measure you want, in other parts of the world as well. And this is an environment with very low interest rates, so the cost of that debt looks manageable. But if rates go up, the cost of that debt is going to look a little bit more onerous. So, I think it's a long-term issue; it's not something that's going to hit us tomorrow. But it's an issue that I think is a headwind.
Another issue is valuation, and by almost any measure, certainly the U.S. market is valued at historical high levels. Whether you do it on a P/E basis, whether you do it relative to GDP, on various measures, the U.S. market in particular is valued quite highly. So, that doesn't say it's going to go down; it just says that you won't get the extra tailwind by valuations going up as you continue to invest in the market.
The last one is very hard to quantify well, but it's effectively two things. One is what I'll call the hangover from the QE process. Quantitative easing, was a very good method of stimulus in the dark days of the great financial crisis, no question about it. My concern is that it lasted way too long and created distortions of its own. And so, I think we're dealing with the aftermath of that, whether it be with what effectively is a large shadow banking environment — helped in part by technology of fintech — but it's also caused some leverage in the system that, to me, is risky.
I lived through the '87 portfolio insurance debacle, where there were many, many investors that thought they could insure their portfolio for the downside. It turns out that assuredness was not correct. And now we have upwards of, by some estimates, $2 trillion worth of investments in strategies that are designed to eliminate or reduce volatility. And they may very well work, but certainly this year we had a 10% correction, primarily due to those strategies not working. And the market got worried, and the market went down. My sense is there are a lot of instruments out there that haven't really been tested well. I don't know if that's going to be a problem, but I know it's out there and I think there is a risk to the market, particularly with these high valuations.
On the other hand — and this is, in part, hopefully the value of being an investor for a long time — I think we're in one of the most exciting periods of innovation in my life. When I started in this business there was no internet. The first cell phone call was made after I started working.
Michael Utley: Right.
Claudia Huntington: The innovations that have gone on in my career had been enormous, much of them internet-based. But now we're in a period of innovation in deep learning, in artificial intelligence, in social media and how that affects buying patterns. It's extremely rapid rate of change in a very disruptive environment, which always is exciting to me because you find opportunities as things are disrupted. So, I'm very excited about those opportunities, but I'm also balanced with worrying about some of these icebergs that I think are out there.
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