The author says forget about most of Europe and Japan. He also talks about his new ETF and the role of demographics in investing.
Harry Dent is founder and chief executive of Tampa, Fla.-based HS Dent Investment Management LLC. He is a best-selling author and money manager who has developed quantitative investment models based on demographic research.
He took time on Tuesday to discuss his latest views on the market with IndexUniverse.com Editor Murray Coleman. They also discussed Dent's new exchange-traded fund, the AdvisorShares Dent Tactical ETF (NYSEArca: DENT). It's scheduled to begin trading on Wednesday. Below are excerpts of that conversation.
IU.com: You’re fairly pessimistic about the market now, aren’t you?
Dent: We do think we’re at the end of this rally. This isn’t like past recessions. Consumer spending by baby boomers is peaking. It’s the end of a long surge that began in the 1980s. Clearly, baby boomers are going to start saving more and spending less over the next decade. That’s going to deflate the whole economy. The next generation should start to pick up consumer spending levels again -- roughly around 2020. That’s when we’re expecting the start of another long-term boom.
IU.com: In the meantime, do you see many short-term opportunities for investors?
Dent: Right now, we’re still seeing a lot of hope priced into stocks for a prolonged recovery. But in 2010, we think markets are going to start falling again and people will become very disappointed. Our expectation is that stocks are heading towards an extended period, which will be marked largely by downturns and sideways movements. From late 2010 through around 2020, we’re expecting stock markets around the world to remain in a trading range with a lot of volatility. We’re expecting the S&P 500 to show a lot of ups and downs over the next decade, moving anywhere from around 300 to 1,100 as markets remain in flux throughout the period.
IU.com: That’s quite a range, isn’t it?
Dent: Yes, that is. The point is that we’re going to see a lot of volatility in the next 10 years. Under these conditions, we think you’ve got to play momentum – there’s not going to be another prolonged boom for awhile. But we do expect some markets to do better than others. When times are better, we expect places like India to roar a little more than most developed markets. Emerging markets, though, will remain extremely volatile. Eventually, somewhere around 2020, I can see us coming out with another ETF that plays strictly in emerging markets. But in the shorter-term, emerging markets are still very dependent on developed markets. And Europe, as well as Japan, are practically dead at this point for investors looking for the best relative growth opportunities.
You’ve also got to remember that emerging markets have just been through one of the biggest bubbles in the past several years. So, there’s going to be a shakeout in the shorter-term in Asia and Latin America. The positive is that even in a sideways-moving global market, emerging markets will see bigger bounces than developed markets. Our model for the new ETF will likely lean towards countries like China and India and other emerging markets when momentum is moving up. We feel like that’s how you’ve got to play global markets in the next decade – with a lot of flexibility to take advantage of movements up while remaining cautious on the downside.
IU.com: In your latest book, you show different demographic trends favoring emerging markets over the next several years, don’t you?
Dent: The strongest demographic trends – countries with growing workforces and growing consumer patterns – are going to be in the emerging markets. Latin America and much of Asia is largely urbanized: India is a little over 30 percent; China is just under 50 percent but Brazil is over 80 percent. So, emerging markets' growth is very tied to this move towards greater urbanization.
IU.com: What regions or countries are behind the curve in terms of urbanization?
Dent: If you take away oil, the Middle East is largely a third-world region. And most of Africa is still struggling to become more urban. So, they’re more frontier markets now. But our new ETF is only interested in investing in countries clearly on the way up.
IU.com: What is your favorite country on a longer-term basis at this point?
Dent: If I had to pick one country for the next 30 to 40 years, it’d be India. It wouldn’t be China. Their demographics are going to work against them. After 2020, urbanization will come at a slower rate since younger people generally are the ones to move the fastest out of rural areas. China’s policy of one child per family, which started in the early 1970s, will begin to catch up with them between 2015-2020. Someone said China is going to get old before they get rich, and we agree with that. By contrast, India’s demographics won’t peak until about 50 years after those of China.
IU.com: Does the new ETF follow your basic investment process?
Dent: It is simply a momentum model we’ve tracked for years. But it’s different than what we’ve done in the 1980s and 1990s – the methodology we tried to use in the past with some of our separate accounts and the old AIM mutual fund. We were subadviser to that fund and AIM just didn’t listen to us. The fund was supposed to be a blend of our models and those developed by AIM. But when markets crashed in 2000-2002 and our models were very cautious, the AIM models were favored and the fund remained quite more aggressive in stocks than our models preferred. That fund ended up getting merged into another one and we learned a valuable lesson: Joint ventures aren’t the best way to go with fund portfolios. We’ve got well-tested, momentum-based models and it’s either got to be our way or the highway in terms of working with fund portfolios.
IU.com: Is that why you decided to go with an ETF structure?
Dent: The ETF structure is very low-cost compared to similar hedge fund and mutual fund strategies. And they’re more widely available compared to hedge funds and mutual funds. Anybody can add our ETF to their portfolio. And we’ve got control over it and nobody else can tell us how to manage our investment model.
IU.com: Can you explain the process that this model follows?
Dent: This is a quantitative-based model. It looks at the universe of developed and emerging markets. It also includes commodities. So it has latitude to go anywhere. The key is how it decides to pull out of sectors and countries. The advantage of any momentum model is that when things are going well, the model does, too. But, of course, the difficulty is moving out of an area of the market, or back in, when things aren’t going so well. There’s always going to be a lag – you’d have to be a genius to time markets perfectly.
But this ETF’s model isn’t going to act like an actively managed hedge fund or mutual fund. This ETF will be on a monthly rebalancing schedule, so there’s going to be a lag time between shifts. So the key is going to be to get the general trends right. We’re not trying to time exact tops and exact bottoms. The model has some technical factors built into its methodology. But technical analysis isn’t always right. So, it also includes elements of fundamental analysis. We believe this is the best model for a market that’s heading towards an extended winter.