It’s not often that a value manager, such as the big US mainly-fixed interest house Brandywine Global Investment Management gets excited by some news signalling an uptick in growth.
But this happened last week with the surprisingly strong numbers for the PMI in the US (the Purchasing Managers’ Index).
The Institute for Supply Management’s Manufacturing ‘PMI’ rose to 57.8 in June from 54.9 in May. The was “way above market expectations of 55.2”, according to Brandywine. The reading pointed to the strongest rate of expansion since August 2014, as output, new orders and employment grew at faster pace.
The significance is that many pundits had thought that the US recovery had faltered, and some still do. Nevertheless, the PMI figure announced last Tuesday Australian time was a good sign for US growth.
Visiting Australia last week to speak with clients and advisors, long-time head of fixed income at Brandywine, David Hoffman, said, however, Brandywine remained in the “lower for longer” camp. That means the firm believes interest rates are not going to jump, globally – particularly on the US – anytime soon. And neither will inflation, which growth managers are betting on.
“Those PMI numbers last Monday,” he said last Friday, “could mean that the trend is breaking. “But we think it will be subdued. Rates are not going anywhere anytime soon.”, he said.
Hoffman, who has been at Brandywine, an affiliate manager of Legg Mason Global Asset Management, since 1995 and has led the development of the firm’s fixed income business, particularly in the more interesting areas of investment grade, credit, absolute returns and emerging markets debt, describes interest rates and currencies as “the shock absorbers” for the global economic system. Brandywine has about US$71 billion under management, mostly in a range of fixed income strategies.
Right now, those shock absorbers are working overtime. Asked whether this is the most interesting time for many years to be a bond manager he replies: “It’s certainly one of the most challenging… but at the extremes rates and currencies create opportunities.”
“When you think about rates and currencies, they are the two side of the value of money,” he says. “We are money managers and we manage the probability of getting our money back, for clients. On the other hand, an asset manager owns certain assets, shares and property say, and manages those. We only manage money.”
Hoffman, being of a certain age, has a strong historical bent to his outlook on managing money. He notes, for instance, that many of his younger colleagues have never experienced a bear market in fixed income. Over time, though, interest rates cannot deviate too far from nominal GDP growth.
“What is normal? You probably have to look back to the 1950s or before to see what’s normal. The amount of debt we have has created a ‘quasi gold standard’. We are unable to get rates up much because we have so much debt.”
So, what does an investor do in the current environment? For an Australian investor, the news is probably better than for an investor elsewhere in the developed world. For starters, Brandywine has an excellent track record in managing its Aussie dollar exposures.
“In about 2001-2002 we were loaded up to the gills with Aussie dollars,” Hoffman says. “We own some now too, we sold out of New Zealand dollars about six months ago and moved the money into Australian dollars.” That 2001-2002 call, when the Aussie went above parity versus the greenback and stayed there for more than a year, delivered a great return for Brandywine. The firm is currently “sanguine” about Australia.
But Hoffman stresses, as a good value manager, the firm is not an active trader. It’s a long-term investor. “We don’t do arbitrage trading. We are a big-picture manager,” he says.
In its current thinking, Mexico is “ok”, notwithstanding the vagaries of the Trump White House, Brazil is also “ok”, having performed very well in the past year or so – “although it’s a messy country, every good investment is a bit messy when it starts out” – and Turkish bonds are starting to look good. For some of its portfolios, Brandywine has also recently bought Egyptian T-bills. Hoffman says the firm “likes” India, “but liking is not loving”.
He is relatively positive about China, even though, as a liberal who once stood for Congress, he has difficulties with the country’s ongoing human rights issues.
“Chinese debt seems to us to still be a challenge, although we don’t think it’s likely to be the disaster that some people think. They have the savings to write off more of their debt than other countries can… Their SOEs [state-owned enterprises] are more like employment agencies than businesses.”
Emerging markets in general, though, have a much bigger part in the global economy than they did, say, 20 years ago. Some of them, for instance in Africa, are “skipping a step”. As has been recorded elsewhere. Many African countries are bypassing the nascent banking infrastructure, because if technology, and doing their “banking without a bank”, as Hoffman puts it.
The two big influencers going forward are technology, with its increasing disruption, and populism, with its own increasing political disruption.
Greg Bright is publisher of Investor Strategy News (Australia)