One On One With Rod Smyth, Chief Investment Strategist at Wachovia Securities
Monday, May 01, 2006
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SUSIE GHARIB: Despite all the inflation talk today, our guest says we`re in a, quote, almost perfect economic environment. Joining us now to explain, Rod Smyth, chief investment strategist at Wachovia securities. Hi, Rod.
RODERICK SMYTH, CHIEF INVESTMENT STRATEGIST, WACHOVIA SECURITIES: Hello, good evening.
GHARIB: Good evening. I`m wondering, is inflation a risk to your scenario of a perfect economic environment?
SMYTH: Let me explain a little bit about what I mean by perfect economic environment. What I mean is that almost every region of the world is growing at the same time. You`ve got the U.S. still growing after several years. Europe and Japan now recovering, and the emerging world -- Latin America, India, China -- frankly booming. So from a growth point of view, it`s almost perfect. What makes -- has made it so enjoyable for companies is that while it has led to higher commodity prices because wages have been so restrained, companies have been able to grow their profit margins to record levels without raising prices by simply absorbing higher energy costs in declining wage costs. So we`ve had a great environment, but we are now getting to the point where the global economy is so hot that it is leading to little bits of inflation, as you reported earlier.
GHARIB: So is... so do you see it as a risk? You heard our report. I mean there are some fresh economic data that seems to be pointing to intensifying of inflation. Is that a risk?
SMYTH: I think the risk is less but inflation gets any kind of significant toehold. As long as wages remain contained and part of the reports, the economic reports, showed that the employment cost index actually declined. I think the risk is simply that economic growth is so strong that long-term interest rates are going to continue to rise. We have a bear market in the 10-year and 30-year Treasuries that I think is not over yet. And that`s why I think the stock market sold off today. And that`s going to put a cap, I think, on how much the stock market can rise.
GHARIB: It is a tricky time for investors. Should they sit tight or should they be buying? What is your view?
SMYTH: Well, I think one of the things that we wrote about this week that`s important for investors is to acknowledge that times are good. I use the analogy imagine you`re at a party. You know the party is going to go on for a while. It feels like it`s a great party. There comes a moment, however, where you want to start drinking water and preventing yourself from a hangover. The tremendous strength in the global economy has led to the lowest quality bonds and the lowest quality stocks doing the best. If you`ve got those, if you`ve got energy and materials, if you`ve got industrials and commodity plays, they`ve done tremendously well and probably will go on doing well for a little while. But we think it`s a good opportunity to just take a little bit of profit and reinvest in higher quality issues which will certainly do better in our opinion once the global economy starts to cool off a little bit.
GHARIB: Do you think that American investors should be looking to invest their portfolios into more international equities?
SMYTH: Yes I do. In fact in our recommended portfolios and in the portfolios that we actually run, our biggest overweight positions have come in the international markets. In the developed markets in particular we`ve focused on Japan which is finally come out of a 12-15-year economic slump and I think has lots of growth ahead of it and also into some of the Asian markets like Hong Kong and Singapore that are beneficiaries of what`s going on in China. And well, we think valuations are reasonable. Indeed all the emerging markets have been tremendous places to invest. We`ve been taking little bits of profits in those emerging markets that are very tied to commodities like Latin America.
GHARIB: OK, all good advice. Rod, thank you very much for coming on the program.
SMYTH: My pleasure.
GHARIB: We`ve been speaking with Rod Smyth, chief investment strategist at Wachovia Securities.
