Fitzsimmons: Why Euro Stocks Have More Room To Run

March 10, 2015

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 sat down with to discuss the latest policy moves from central banks, and what that means for global stocks, currencies and bonds. He also tells us what he expects out of the eurozone and Japan in 2015. In the first two months of 2015, plunging oil, the ECB's QE and Greece dominated the headlines. What else should investors be focusing on?
Brendan Fitzsimmons: Part of the reason why you had so much attention to ECB QE—and part of that itself being a function of the collapse in energy prices, and therefore the impact it had on headline inflation, which has been the motive for getting enough of a majority across the ECB to move forward—is you've got a lot of policy moves that have happened by many central banks over the last couple of months. You can start from the end of October with the BOJ move.

You have the benefit of, for most countries' economies, the lower energy prices—especially to the extent that they no longer are continuing unrelentingly downward where you hit a potential inflection point where an additional dollar drop in a barrel of oil no longer has a net positive takeaway.

What people haven't been thinking about and are just now starting to conceive of is, given the fact that the U.S. economy continues to grow and other parts of the world are showing stabilization or slight improvement rather than further deterioration—this thesis that has been predominant outside of the U.S. story for the last several quarters, which is one of increasing recession and disinflation, and, in fact, the factors that provoke the policy responses we've seen—the tension has tended, until very recently, to be about, when does the U.S. get wound into that reality that defines most of the rest, rather than, is the U.S. story and the rest of the world, with a little bit of lag time, with a little bit stronger dollar, weaker oil, more policy from various forces, seeing more stabilization and a potential for the gap closing towards growth and reflation rather than towards recession and deflation? So does that bode well for global stocks in general?
Fitzsimmons: Yes, that's why I said even within the last several weeks you've had that instinct start to be explored. Some areas sooner, more clearly than others, because you still had these hanging issues—in terms of Greece, and there was some tension about less clarity on Russia/Ukraine. They're still out there, but you've already started to see some of that play out in the rallies in global equities in the last couple of weeks. A couple of weeks ago, you had a revision lower in global growth to 3 percent. That may in retrospect be the low, and you could start to see them revised upward.

Obviously, these revisions upward come with a lag. So there's still space for the market to dispel some of its greatest anxiety about persistent disinflation leading to deflation through an unanchoring of expectations and evidence that growth is stabilizing, if not improving. Like you said, falling oil prices have eased inflationary pressures, allowing central banks to cut rates. But is that fueling a global currency war?
Fitzsimmons: The flexibility to adjust policy lower, in most of these countries, is welcome, and as long as the currency response is not dislocated and works against the ability to ease policy, many countries are not particularly concerned. To the extent that the U.S. bears the burden, it's the flip side of when the U.S. enjoyed the benefits of the broadly weaker dollar. Although it wasn't being pursued in that regard, you had that.

The irony is no greater than in Brazil, where they were at the front end of the currency war rhetoric previously when the real went down to 1.55 or 1.60. Now, ironically, they have one of the worst-performing currencies against the dollar and we're at risk of testing 3 real to the dollar. It's not because they have suddenly sought to pursue a weaker currency or that the U.S. has sought to see as strong of a move as we've seen broadly in the dollar.

It's really a function of very different respective cyclical environments. Brazil is a good example in that it hasn't been able to ease policy because of the unfortunate combination of the political aftermath of uncertainty around the elections, plus the continuing weakening growth dynamic and the persistence of high inflation that has been made worse by some administered price increases.

So that's a good example where the market has weakened the currency, not because the bank has been cutting rates; it's the opposite: It's got one of the highest real rates out there, but it's because of the mix of growth and inflation is relatively toxic. For other countries, it's not a pursuit of a weaker currency, it's more taking the opportunity to ease that's been largely provided by weaker oil.

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