Doug Cote, chief investment strategist at ING U.S. Investment Management and a long-term market bull, is feeling uncharacteristically defensive this year.
Despite the recent rally in domestic equities, he favors obscure frontier markets and offers his views on government regulations, taxes and the Federal Reserve's stimulus programs, as well as the latest news from Europe.
InvestmentNews: What do you think of the Cyprus government's bid to take money from personal bank accounts to help pay for the bailout of that country's financial system?
Mr. Cote: Something like that happening was not a surprise. This is a little country with outsized debt and no money, and everyone is whistling past it like it's no big deal. This is systemic risk in all its forms, because for the first time ever, deposits faced a haircut. Just think about what that signals to all the other European bank depositors.
InvestmentNews: Will the developments in Cyprus trigger a stock market pullback in the United States?
Mr. Cote: I am positioned defensively at this point. And I've been defensive in 2013 because I see that the market is not paying attention to some of the problems.
I have been wildly bullish for a long time, but my theme going into 2013 changed because I see warning signs. My model is if corporate profits go negative, it is a sign that something is amiss in the global economy. That's why at the start of the year, I became a seller of equities and a buyer of bonds. Meanwhile, I've been wrong, because the stock market has been ripping. But Europe is in its third recession in five years and the silence has been deafening. At this point, all the black swans are likely to come from Europe, and we just got one with Cyprus.
InvestmentNews: What has been driving U.S. stocks this year?
Mr. Cote: The Federal Reserve's unprecedented monetary stimulus has been focused clearly on the consumer and housing. What the Fed correctly has seen is, with the consumer being 70% of the economy, the best way to increase employment and help the consumer is to have the housing market go up. Clearly, housing is recovering and construction jobs are growing. I would applaud the Fed for getting housing off the ground.
InvestmentNews: Where do you see investment opportunities?
Mr. Cote: Look past the domestic stocks to the frontier markets. Most investors missed the BRICs [Brazil, Russia, India, and China], but there are still opportunities in what I call the PIVOT frontier countries: Peru, Indonesia, Vietnam, Oman and Turkey. The frontier markets are a bright spot, and I think investors need to look far and wide because there's no growth in the developed economies.
InvestmentNews: Are you wrestling with the pros and cons of the current Fed policy?
Mr. Cote: When I look at the opportunities in global trade, technology, frontier markets and energy, I am bullish on the U.S. economy, longer-term. If we really take off the government restrictions, we have the potential for a big boost to be energy independent in three to five years. And I think we could go from a trade deficit to a trade surplus within two or three years. But right now and in the next year, the entire developed global economy is in or near recession, and I think the markets are a little too exuberant.
The biggest risk is the lack of economic and corporate growth, and that's because of too much regulation and too many taxes. If this economy doesn't grow, a lot of other problems will come to the fore again, including a serious debt problem. We need some serious growth policies, and that means getting government out of the way. One of the reasons the stock market has been going up is because the sequester happened.
The government's not spending another $85 billion means the private economy doesn't have to give the government another $85 billion. They continue to kick the can down the road, which is good for housing and the consumer, but the negative side is that the Fed has gone overboard. They are not solving the underlying problem by introducing some pro-growth economic policies.
jbenjamin@investmentnews.com Twitter: @jeff_benjamin
