It’s time for central banks to withdraw and let world markets stand or fall on their own merits, according to participants in a panel discussion on global strategy at the fourth annual Delivering Alpha conference in New York today.
Much of the discussion was in reaction to comments yesterday from Federal Reserve Chair Janet Yellen, who told Congress that the U.S. economic recovery is still weak and central bank intervention should continue.
Balderdash, the panelists insist. “The U.S. economy is doing pretty well,” declared Jane Mendillo, CEO of Harvard Management Co., which manages the university’s $32 billion endowment. “The training wheels have been on for too long. Most of us are prepared” for the Fed’s program of quantitative easing to end, she added.
Paul Marshall, chief investment officer at London-based hedge fund Marshall Wace, shared a similar view. “The perception from the rest of the world — from the little old U.K. — is that the U.S. economy is in very good shape,” he said.
“It’s been a globally rigged market since 2009, when QE started,” Marshall added. Until central bank intervention ceases, it will be impossible for people to have confidence in the recovery. Even so, withdrawing will require “a very historic adjustment for which there is no precedent,” he allowed.
Last year, global markets spiraled out of control when Yellen’s predecessor, Ben Bernanke, indicated that the Fed might begin scaling back its $85-billion-a month bond purchases, and emerging markets were especially hard hit as investors pulled back in search of safer havens. A recurrence is unlikely, the panelists believe, although several noted that greater granularity is needed when discussing developed versus emerging markets, and even sectors and stocks within those markets.
Mary Callahan Erdoes, CEO of J.P. Morgan Asset Management in New York, drew chuckles from the audience by noting that last night “China came out with its very predictable 7.5 percent” real gross domestic product growth forecast for the year, while Lee Ainslie, CEO of Maverick Capital, warned that China’s overheating property sector remains a worry.
When it comes to bubbles best avoided, China’s Internet and social media stocks are at the top of Mendillo’s list, she quipped, while Russian stocks — which are selling at just five times earnings, on average — “may not be cheap enough.”
Marshall said it’s important to draw distinctions between such “promising” emerging markets as India and “cheap-dollar junkies like Turkey and Indonesia,” which nonetheless provide a lot of opportunities for shorting.
Callahan raised a red flag regarding massive inflows into fixed income — $50 billion thus far this year, she reported — saying the sheer volume “gives me great pause.” However, she also believes that “the U.S. economy looks strong” and noted that unconstrained bonds, which afford managers greater investment flexibility in a rising-interest-rate environment, were attracting the lion’s share of inflows.
Follow Tom Johnson on Twitter at @tjohnson_nyc.