One on One with Jeffrey Applegate, CIO, Fiduciary Trust International
Monday, July 10, 2006
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SUSIE GHARIB: Our guest tonight says despite the recent volatility in the markets, he expects stocks to be up by 10 percent by the end of the year. Joining us now, Jeffrey Applegate, chief investment officer of Fiduciary Trust International. Hi, Jeff, nice to have you back on the program.
JEFFREY APPLEGATE, CHIEF INVESTMENT OFFICER, FIDUCIARY GLOBAL ADVISORS: Good to be here, Susie, thank you.
GHARIB: Well, let`s first get a little bit of your analysis on where you think the markets are going. Is this a bull market, a bear market, or are we in some kind of corrective phase?
APPLEGATE: I think correction is the right word. We don`t think we have the makings of a cyclical bear market. We don`t think the next stop is recession down earnings. So what the markets, we think, have been adjusting to because it`s been very choppy as you know for the last six weeks, adjusting to really two things, interest rates that are going to go higher than equities had expected and also probably a slowdown in growth. This is more true in the U.S., not so much the rest of the world, but a greater slowdown in growth than the markets had been looking for.
GHARIB: Should investors be worried about inflation or, worse yet, a word that keeps cropping up, stagflation?
APPLEGATE: It`s certainly a worry and always a valid concern. At the end of the day, if you don`t have a lot of strength in terms of labor costs, then it`s tough to get real excited about a significant long-term problem with inflation. And one of the reasons actually we`ve been pretty optimistic about the inflation outlook in terms of core inflation, is that labor costs locally and globally have been very well maintained and labor costs account for really 70, 80 percent of core inflation.
GHARIB: As you heard in our report, a lot of investors are hoping that a strong earnings season will be a good dose of news for the market. Do you think that the earnings that are going to be coming out are -- we`re going to see a market rally come out of that?
APPLEGATE: You may. It depends on what the other moving parts are. If you keep in mind last year, Susie, we had terrific earnings growth, actually almost 15 percent. But the market had a difficult time getting out of its own way because the Fed kept raising rates. So I think the market is still dealing with, well, what degree are interest rates going to rise because that will offset some of the rise in earnings. If the Fed is nearly done -- as we think they are -- then that`s one of the key reasons why we think equities should have a fairly decent year.
GHARIB: With all these question marks that are hanging over both the economy and the markets, what is your investment approach? What is your strategy?
APPLEGATE: Our strategy first in balanced funds locally and globally has been to overweight equities and underweight bonds. Within our equity portfolios, we`ve ended up in a position where we have more exposure to non-U.S. stocks than we have U.S. stocks at the global level. Domestically, I think, one thing that will probably change would be different from where we started out the year is that U.S. small caps, which had done much better than large caps, actually, for quite a while now, typically if the U.S. economy is slowing, those small caps are more dependent on local growth. They also aren`t direct beneficiaries of a weaker dollar which we think we`ll also see. So we think you`re probably going to see a shift in leadership at the U.S. level away from small caps and more towards large cap stocks.
GHARIB: Is beyond the large cap/small cap in terms of leadership, what sectors, stock sectors do you see will be taking the lead?
APPLEGATE: Well, if we`ve got the outlook correct, which is global growth is still going to be pretty good, around 4.5 percent, but the U.S. part is slowing down, then those sectors of the U.S. equity market that are most exposed to non-U.S. geographies should do pretty well. So that by extension means that the sectors that have already been doing pretty well, energy, materials and industrials, these are the sectors that have the highest non-U.S. sales disclosure.
GHARIB: Are you still putting your portfolio dollars into energy companies given that oil prices are now at $73 a barrel?
APPLEGATE: We haven`t increased our weight and on -- if oil prices were just trading as a function of supply/demand, we think prices would be closer to $60 a barrel. That said, obviously, there`s a pretty sizable geopolitical risk premium in these prices. And, again, I think the more important thing is to look at what still is fairly robust final demand for the core product as well as the fact that a lot of sales for this sector occur outside the U.S. where we`re really not looking for a slowdown in growth at all.
GHARIB: All right, Jeff, thank you so much. We appreciate your insights.
APPLEGATE: My pleasure. Good seeing you.
GHARIB: We`ve been speaking with Jeffrey Applegate, chief investment officer of Fiduciary trust International.
