One on One with Jeffrey Applegate, Chief Investment Officer at Citi Global Wealth Management
Monday, December 10, 2007
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SUSIE GHARIB: Our guest tonight says that as long as the Fed cuts interest rates, stocks will do well. Joining us now, Jeffrey Applegate, chief investment officer at Citi Global Wealth Management. Hi Jeff.?
JEFFREY APPLEGATE, CHIEF INVESTMENT OFFICER, CITI GLOBAL WEALTH MANAGEMENT: Hi Susie. How are you?
GHARIB: Good. Thank you. Give us your analysis on the connection between the Fed and the stock market.
APPLEGATE: Sure. The tightening we've seen is the credit markets threaten to tip us ultimately into a recession if left unchecked and we think the Fed is alert to that risk. They have obviously already reduced interest rates twice. We think they will go again tomorrow, but they won't be done. We're looking for further rate reductions from the Fed and ultimately we think we will avoid a recession as a result of their actions.
GHARIB: Some people say that with the housing mess that we've been seeing, it's going to take a long time for it to work it's way through and even with interest rate cuts, it may not help. So, what would that mean for the stock market?
APPLEGATE: Well, I think that's right. Housing is still detracting from GDP and we think will continue to do so in terms of reducing growth in 2008. I think the key thing about the Fed, the action they have taken and will continue to take is that it will help un-stick the frozenness that we've had in credit markets and you'll get some lending mechanisms back in place which aren't currently lending and that will help the other parts of the economy continue to grow. So that really is really the transmission effect of Fed ease and to keeping the economy out of a recession.
GHARIB: Let's just say that tomorrow the Fed does not cut interest rates. Does that mean it's time to sell stocks?
APPLEGATE: You'd certainly have a big sell off tomorrow because as you've noted earlier on the program, the market has been discounting a further Fed ease tomorrow and I think it would - I don't think they're not going to cut rates. SO I think the big issue is whether they do 25 or 50 basis points argues that we wish they'd do 50. They'll probably do 25 however.
GHARIB: Jeff, your asset allocation for longer term investors on average is weighted towards stock, 65 percent equities, 35 bonds and cash. Why are you more positive on stocks versus bonds?
APPLEGATE: We've got a view that not only will the Fed be reducing interest rates but also some of the other key center banks around the planet and you may have noted last week the Bank of Canada cut rates, Bank of England. We're also looking For the European central bank to ultimately cut rates because the sub-prime crisis isn't just an American phenomenon. It's really moved to the global level and raises the risk of a recession at the global level. As central banks here and abroad cut rates that should be positive for equities because you're simply reducing the discount rate that you apply to the earnings stream, which at the end of the day is usually pretty good tonic for equity returns.
GHARIB: So, when you look at the equity choices out there for long- term investors, where is a good place for them to put their money? What sector do you see as the leading sector for 2008?
APPLEGATE: Well, I think one sector to certainly look at is the sector that's been the most battered since July and that's financials, both of the almost level as well as at the global level. So we would imagine that if equities do stage a fairly decent recovery a little bit of which is already underway then among the leadership, there should be financials in terms of primary sectors (INAUDIBLE).
GHARIB: Is the worst over for the financials?
APPLEGATE: Not necessarily. You led your stories tonight with more write offs and so, I don't think we're quite out of the woods yet but I think if you can take the luxury of a longer term view, i.e. several months, six to nine months forward, then the outlook for equities assuming we get the kind of central bank ease that we believe we'll get, should be pretty positive.
GHARIB: I know you can't name any stocks, so let me ask you about another sector. What are other sectors that you are avoiding looking into 2008?
APPLEGATE: Well, I think some of the fairly highly priced defensive sectors don't look that good today. Looking to say defenses plus keep in mind that if we do get an equity recovery, then you ought to get some participation in terms of global growth stocks of both local and global. Some growth as compared to value would be an equity style that we would favor. Also, within equities just looking at geography, emerging market equities as you know have already done quite well this year and with central bank ease coming out of North America as well as Europe, that is a further positive for emerging market equities. SO we would imagine those returns would also be quite good.
GHARIB: All right, a lot of good information. Thank you so much for coming on the program, Jeff.
APPLEGATE: My pleasure Susie.
GHARIB: My guest tonight, Jeffrey Applegate, chief investment officer at Citi Global Wealth Management.
