Brendan Fitzsimmons is head strategist at Medley Global Advisors, a global macro research and advisory firm based out of New York. The firm is part of the Financial Times' media empire, and is run by the former editor of Lex, the FT's incisive investment column. Medley Global's goal is to tap into FT's full reach of the world's leading policymakers, government officials and investment experts for insights that will be valuable to the world's top hedge funds, institutional investors and asset managers.
Fitzsimmons recently sat down with ETF.com to discuss the potential implications of Scotland's exit from the U.K. He also tells us why he's neutral on the eurozone and which emerging markets he thinks are poised for long-term growth due to recent political changes.
ETF.com: In a surprise twist, the pound sterling is getting crushed, with the Scottish referendum to leave the U.K. gaining momentum. What's your take on all this? Should U.K. or European stock investors be concerned?
Brendan Fitzsimmons: I think in part it's a function of how little previous pricing of the risk of a successful vote had been, because the polling had not shown a surge in the potential for a yes. I think it was really dismissed as a tail event, which is now being called into question by the narrowness of the most recent polls. So I think part of it is a repricing for a tighter race that has become more evident, then some overreaction.
Part of this is also a function of where things have been with regard to the U.K., to the economy in terms of expectations for the Bank of England. Although they had been unwound somewhat from the most hawkish expectations a few months ago when you had the Mansion House speech, which basically had the Bank of England warning the market that it might be coming sooner than the market was thinking.
So the market was seen as complacent. That gave a bid to sterling, from which it had started to retreat because some of the data had not been as compelling for the soonest move from the bank scenario.
I think part of this reaction is still an assumption that this will take some of the wind out of the sails of a sooner move by the Bank of England, just because of uncertainty and because of the presumed implications of a successful vote in terms of the U.K. economy, in terms of the lost output.
First of all, even if there were a yes vote, it would take some time to process the reality into fact, and during which time, it's not certain that you would have a negative impact to the U.K. economy. To the extent that you, down the line, would lose output, you would also lose the costs, or the transfers that go from London to Edinburgh.
So I think it's more complex than the knee-jerk reaction, but the knee-jerk reaction itself is understandable given the polling and the debate and the broader context of the U.K. economy and sterling seen as outperforming obviously the euro.
The other thing is, it goes beyond Scotland in the European context, because it's seen as, if it can happen here with Scotland, it certainly puts potential flames to tinder in Catalonia and potentially re-stoking issues in Flanders with regard to Belgium. In that context, it would be a wedge of uncertainty that has not been priced.
It's kind of like you pull the strings on the Scottish referendum, and it runs through the weave of a number of issues within Europe, at a time when the European economy itself is performing even more weakly than it was doing earlier in the year when the expectations were not so great of any risk from Scotland.
ETF.com: Eurozone stocks have gotten hit in recent months, with some broad indices down over 10 percent. What are you telling your clients right now with regard to the eurozone? Do you see this sell-off as an opportunity?
Fitzsimmons: It still feels too soon to be judged an opportunity, because while you have greater commitment, as we've seen in the recent sort of slate of moves, both actual and prospective from the ECB at the September meeting and Draghi's anticipation of Jackson Hole, it still, between the articulation and the delivery, and between the delivery and the impact—which the ECB itself admits takes time and does not primarily address the challenges, because they're bound up in issues on the structural reform in terms of the different fiscal positions of respective states—this is something that's really a time-buying mechanism, rather than a palliative.
That's where I think the reality of the data being weaker, in addition to the continued persistence of disinflation, works against this being seen evidently as an opportunity despite the fact that you've already had some notable repricing.
ETF.com: Switching over to emerging markets, last quarter, you hinted at positive developments for Indonesia, where you saw value. Now that Joko Widodo has won the elections, are you more optimistic about Indonesia's prospects?
Fitzsimmons: It's in line with the elimination of that uncertainty and the generally more beneficial outcome that was bound up with that. In both the Indian and Indonesian case, you've gotten the positive market outcomes.
Then you get into the next stage—and we've already seen this in the past year-plus on the Mexican case—there's also a period of getting over the honeymoon of the initial political event outcome and getting the sort of machine of policy, and from policy formulation, to policy implementation, to the reaping of rewards, and that amidst the challenges of what's going on in the domestic and global economy.
It's a broadly positive story for Indonesia, but it's not going to be without its bumps between here and going forward.
ETF.com: You mentioned Mexico and India. Since you singled out Mexico as a rising country back in February, its stock market has surged. The Indian stock market has literally gone gangbusters due to expectations of reform from Modi. Has all this optimism already been fully priced into the Mexican and Indian markets, or do you still see value in these markets?
Fitzsimmons: It depends on the time frame. I think in a shorter time frame—and we've actually seen that prior to the beginning of this year in terms with Mexico—the overall story has been one of positive rewards in terms of the equities.
But it's not been without its hiccups in terms of the time scale for the primary legislation, the secondary enabling legislation, and then people thinking about it in terms of certain sectors, being bad for a certain industry before they're good for the nation.
I think that experience in Mexico is probably worth paying attention to and instructive for processing the progress or lack thereof in terms of the expectations and the valuations that have been priced in terms of India. I think the Indian story is seen, and will continue to be seen as positive, given the capacity at the Reserve Bank of India to manage policy, and given this well of expectation in terms of Modi.
I think what's still not clear is how proximate the deliverables will be, given how much you've boosted the prices. That's why I said time scales are important here. If you're talking about between now and the end of the year, if there were to be a hiccup in the broader global equity story, either into the end of the quarter or into the end of the year, India would be at risk of being sold.
But if you're looking beyond the end of the year, through next year and over the next couple of years, provided that Modi is able to move from concept to action, it's still a positive story.
That's in contrast today with China, where the expectations have been so high, and the ability to continue to deliver at or above those expectations has been challenged over the last two years.
ETF.com: In the last few interviews, you've been neutral on China. But in recent weeks, China's mainland—or A-share—market, has surged. Has this surprised you? Do you now have stronger views about Chinese equities?
Fitzsimmons: It hasn't surprised us to the extent that the weaker the data, the greater the anticipation that you're going to get policy to accommodate the concerns. You've had this narrative of mini-stimulus, that you were going to have cuts in the reserve ratio requirement levels, you were going to have various loosening of monetary policy, which in actual fact have not happened. But the persistence of the expectations of policy has, along with valuations.
If you looked at it before this recent surge, China and Russia were the extremely cheaply valued equity markets. So they did not participate as much in the second-quarter rebound from the first quarter in emerging markets. To some extent, they've benefited from that out-of-cycle condition of low valuations. With China, though the data continues to be not as robust, and particularly on the credit side not as strong as people have expected, you've benefited from a valuation story.
The other thing that has supported Chinese equities is the weakness in the property market, which tended to be where more of the domestic wealth has been invested and concentrated, because of the poor performance of Chinese equities over the past several years, after the last collapse.
So you may have a bit of a pendulum swinging back in terms of—and with some instigation from—the authorities directing attention to the equity side and away from the property market, which they do want to see correct, just not bust.
That may give equities a bit more support. But again, you've already bounced a fair bit on a lack of actual deliverables. I think on a short-term basis, we're still rather neutral on China.
ETF.com: Obviously the big news right now is the upcoming Alibaba IPO. Do you see this IPO as a catalyst for continued momentum in Chinese equities?
Fitzsimmons: I don't think you can say that broadly across Chinese equities. I think sectorally it certainly is going to give some loft to technology and part of what has built a premium into Alibaba. Apart from the fact that it has a bit more global reach than some of the others, the experience with it is more tangible because of [Alibaba's] relationship with the U.S. side.
The one relatively consistent, bright spot in China is consumption, because you do have a positive demographic for those that are currently moving through the workforce, of working age, in terms of income, in terms of disposable personal income and employment prospects. They're positive, and you've seen this in the continuing gains to consumption.
So I think it has to be looked at in terms of specific sectors and companies, rather than necessarily just Chinese equities in general.
ETF.com: Is there any market where the consensus is wrong and you actually see assets grossly mispriced? Where do you see opportunity and value?
Fitzsimmons: Nothing right now stands out as remarkably mispriced. If you take Russia, it's kind of binary in terms of, if you were to have an intensification of fighting and activity, involvement of Russia in Eastern Ukraine and a further escalation of sanctions—if that were to break down, I think some of the residual "Russia looks cheap and this is going to have to get resolved because it can't possibly go pear-shaped"—you could have a reconsideration of that if further sanctions that drove deeper on both sides were to come out of a reintensification of combat.
On the other side, I think if this truce does hold, and if it basically achieves the aims certainly that suit Moscow, the market has been rather forgiving, and we haven't plumbed the lows of the second quarter in this period since the MH17 incident.
So if you really parked this in a more lasting way through a truce, and if you get through the next couple of weeks and months, get through the parliamentary elections in Ukraine, and you get to a modus vivendi between Kiev and Moscow, and especially if you were to get a deal that resolves the still-uncertain situation with regard to winter gas between Russia and Ukraine and transit across Ukraine between Russia and Europe, then I think Russia would be seen again as this undervalued story.
The other market that stood out in the last few weeks in terms of client interest is Brazil in the context of the events with Campos' passing and the rise of Marina [Silva] as the alternate opposition candidate. Then on top of that, over the weekend, now the issues around the Petrobras scandal and how that'll play out.
In this case, you've already had a significant positive move in Brazilian equities, and you had a positive story in the currency. The reality is much more complex. Even if you were to get Marina rather than Dilma [Rousseff], and given this deeply conflicted story with Petrobras, and given Petrobras' relative weight within the Bovespa, it's a much more complex story.
It would be much more sensitive to not only the domestic story and how it evolves with a very weak economy and processing the run into the election in October, it would be very highly sensitive to external factors.
So again, if there were to be any tests of the recent strength in global equities broadly, and particularly in the U.S., then you've got a lot of room for the Bovespa to fall still within the range of this year.
ETF.com: Thanks for your time.
Fitzsimmons sees reform expectations from Modi's election win priced into Indian stocks, and even thinks Indian stocks are vulnerable to global shocks. Still, over the long haul, he sees a positive growth story from the recent political changes. For cheap, cap-weighted exposure to Indian securities, look no further than INDA, which holds roughly 70 large and midcaps traded on the NSE and BSE. Even though the fund charges 67 basis points, it tends to trail its index by only 46 basis points over most 12-month periods, lowering overall holding costs. Roughly $10 million trades at 7 basis point spreads, meeting the needs of small investors, but block traders may have some difficulty finding bargains, not to mention a creation unit accounts for close to 4 percent of INDA's underlying constituents' volume.
When discussing market opportunities, Fitzsimmons differentiates between short-term ups and downs and long-term appreciation. When we spoke to him earlier this year, he emphasized that Mexico is "a positive work in progress" but that that it won't necessarily be a smooth ride. Fitzsimmons noted that while the country is on the right long-term path for growth, it still has hard work ahead in terms of actual implementation of reform programs. He also opined that Mexico will benefit from being less dependent on accommodative U.S. monetary policy than most other emerging markets. Investors looking for a comprehensive Mexico ETF need look no further than EWW, which has a 0.50 percent expense ratio for a basket of roughly 60 Mexican companies. Access won't be an issue here: EWW trades more than $100 million most days at tight spreads averaging only 2 pennies wide.
Similar to his view on Mexico, Fitzsimmons remarks that Indonesia's election of Joko Widodo is a positive market outcome that will take time to culminate into implemented growth reforms. Regardless, Fitzsimmons summarizes the opportunity as "a broadly positive story for Indonesia, [that's] not going to be without its bumps." EIDO delivers a representative portfolio of more than 100 investable Indonesian companies spanning the Indonesian market-cap spectrum. With more than $10 million of EIDO shares changing hands most days and average spreads of 8 bps, the fund is also readily accessible.
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Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.
We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.
|Ticker||Fund Name||ETF.com Pick Date||TR % (Since Pick Date)||TR % (1 Yr)||Closing Price $ (9/11/14)||Inspired By|
|INDA||iShares MSCI India||2/24/14||29.54||37.45||31.23||Roubini|
|AMU||ETRACS Alerian MLP ETN||1/27/14||21.37||27.35||33.77||Luskin|
|EWW||iShares MSCI Mexico Capped||3/3/14||19.45||8.43||70.84||Friedman|
|GXC||SPDR S&P China||2/3/14||19.40||10.75||81.95||Rogers|
|PXH||PowerShares FTSE RAFI Emerging Markets||2/17/14||17.55||11.13||22.38||Arnott|
|INDA||iShares MSCI India||4/9/14||15.62||37.45||31.23||Kotok|
|MCHI||iShares MSCI China||4/15/14||15.39||9.53||50.82||Faber|
|GULF||WisdomTree Middle East Dividend||3/10/14||13.67||44.34||24.64||Dorsey|
|EWW||iShares MSCI Mexico Capped||2/11/14||12.51||8.43||70.84||Fitzsimmons|
|GMF||SPDR S&P Emerging Asia Pacific||4/9/14||12.15||17.18||88.31||Kotok|
|CCXE||WisdomTree Commodity Country Equity||3/14/14||10.46||6.19||31.25||Schiff|
|VNM||Market Vectors Vietnam||4/15/14||10.01||29.24||22.81||Faber|
|DBB||PowerShares DB Base Metals||5/8/14||8.98||5.02||17.35||Gartman|
|IEMG||iShares Core MSCI Emerging Markets||4/28/14||8.79||10.40||53.21||Luskin|
|EWP||iShares MSCI Spain Capped||1/27/14||8.34||25.53||40.32||Luskin|
|EWH||iShares MSCI Hong Kong||4/15/14||8.18||15.00||21.95||Faber|
|BKF||iShares MSCI BRIC||5/22/14||8.16||10.47||40.64||Arnott|
|VTI||Vanguard Total Stock Market||4/28/14||7.75||20.09||103.75||Luskin|
|NKY||Maxis Nikkei 225||2/3/14||6.99||3.62||17.61||Rogers|
|RSP||Guggenheim S&P 500 Equal Weight||3/10/14||6.86||20.50||77.83||Dorsey|
|DBJP||db X-trackers MSCI Japan Hedged Equity||6/12/14||6.79||10.26||38.05||Roubini|
|EWI||iShares MSCI Italy Capped||1/27/14||5.63||19.08||16.23||Luskin|
|EWY||iShares MSCI South Korea Capped||2/24/14||5.60||4.09||63.60||Roubini|
|BAB||PowerShares Build America Bond||4/9/14||5.13||15.32||29.66||Kotok|
|EWJ||iShares MSCI Japan||3/3/14||5.03||3.26||11.83||Friedman|
|ELD||WisdomTree Emerging Markets Local Debt||2/17/14||4.63||2.87||46.20||Arnott|
|XLU||Utilities Select SPDR||4/9/14||3.60||20.57||43.03||Kotok|
|VHT||Vanguard Health Care||7/2/14||3.60||27.47||117.91||Yardeni|
|USDU||WisdomTree Bloomberg US Dollar Bullish||4/15/14||3.27||N/A||25.61||Faber|
|IEMG||iShares Core MSCI Emerging Markets||6/12/14||3.01||10.40||53.21||Roubini|
|GDX||Market Vectors Gold Miners||3/31/14||2.82||-8.56||24.27||Merk|
|VTI||Vanguard Total Stock Market||6/10/14||2.79||20.09||103.75||Friedman|
|EWP||iShares MSCI Spain Capped||2/24/14||2.60||25.53||40.32||Roubini|
|EWS||iShares MSCI Singapore||5/5/14||2.52||9.76||13.76||Bremmer|
|CHIQ||Global X China Consumer||3/17/14||2.39||-3.86||14.58||Yardeni|
|TAO||Guggenheim China Real Estate||8/12/14||2.28||6.49||22.46||Faber|
|INDA||iShares MSCI India||7/23/14||2.13||37.45||31.23||Bremmer|
|FXA||CurrencyShares Australian Dollar||3/14/14||1.61||-0.82||90.95||Schiff|
|MUB||iShares National AMT-Free Muni Bond||7/16/14||1.14||10.74||109.19||Kotok|
|EWP||iShares MSCI Spain Capped||3/10/14||0.73||25.53||40.32||Dorsey|
|FXC||CurrencyShares Canadian Dollar||3/14/14||0.55||-6.42||90.00||Schiff|
|ROBO||Robo-Stox Global Robotics and Automation||3/3/14||0.52||N/A||27.10||Friedman|
|SCPB||SPDR Barclays Short Term Corporate Bond||3/17/14||0.41||1.60||30.70||Yardeni|
|EPOL||iShares MSCI Poland Capped||3/3/14||0.38||5.16||28.70||Friedman|
|ITA||iShares U.S. Aerospace & Defense||5/5/14||0.36||22.06||110.06||Bremmer|
|RSX||Market Vectors Russia||2/3/14||0.12||-10.77||24.44||Rogers|
|KOL||Market Vectors Coal||5/8/14||0.05||-6.62||18.53||Gartman|
|EIDO||iShares MSCI Indonesia||5/28/14||-0.08||14.71||27.97||Fitzsimmons|
|IYY||iShares Dow Jones U.S.||9/3/14||-0.15||20.03||101.09||Dorsey|
|VGK||Vanguard FTSE Europe||8/19/14||-0.42||10.26||57.20||Luskin|
|DBGR||db X-trackers MSCI Germany Hedged Equity||2/24/14||-1.14||12.67||25.47||Roubini|
|EPI||WisdomTree India Earnings||9/3/14||-1.20||47.79||23.04||Dorsey|
|CHIQ||Global X China Consumer||2/11/14||-1.55||-3.86||14.58||Fitzsimmons|
|AFK||Market Vectors Africa||5/5/14||-2.26||12.19||32.37||Bremmer|
|EWL||iShares MSCI Switzerland||6/24/14||-2.85||11.43||33.38||Dorsey|
|FXA||CurrencyShares Australian Dollar||7/9/14||-3.14||-0.82||90.95||Merk|
|EIDO||iShares MSCI Indonesia||7/23/14||-4.51||14.71||27.97||Bremmer|
|FXB||CurrencyShares British Pound Sterling||7/9/14||-5.52||2.15||159.48||Merk|
|EZU||iShares MSCI EMU||6/12/14||-6.64||10.62||39.89||Roubini|
|DBC||PowerShares DB Commodity Tracking||3/14/14||-7.72||-8.63||24.02||Schiff|
|DBC||PowerShares DB Commodity Tracking||3/31/14||-8.04||-8.63||24.02||Merk|
|GDX||Market Vectors Gold Miners||7/30/14||-8.31||-8.56||24.27||Schiff|
|SIVR||ETFS Physical Silver||7/30/14||-9.11||-19.22||18.45||Schiff|
|TUR||iShares MSCI Turkey||6/10/14||-9.35||0.85||53.54||Friedman|
As of 9/11/14