Business Insider recently caught up with Rebecca Patterson, the chief investment officer of Bessemer Trust, to hear about her outlook for the global economy in 2017.
Bessemer Trust, a privately owned wealth and investment management firm, oversees more than $100 billion in assets.
Patterson was the former Chief Markets Strategist for JPMorgan Asset Management and former Global Head of Foreign Exchange and Commodities for the JPMorgan Private Bank. She started her career in journalism as a reporter for Dow Jones in London.
She is a member of the Council on Foreign Relations, the New York Federal Reserve’s Investor Advisory Committee and the Economic Club of New York. American Banker named her one of “The 25 Most Powerful Women in Finance” in 2014, 2015, and 2016.
In the interview, Patterson discusses protectionism, China and where she sees value.
This is part one of a series.
This interview has been edited for clarity and length.
Tina Wadhwa: The Dow finally hit the “landmark” number of 20k on Wednesday. Is this overrated, is this relevant? Does it actually mean anything for the markets or is it just a psychological high?
Rebecca Patterson: The Dow reaching 20,000 is more psychological in my view than anything. What’s more important is what’s happening behind the scenes. Economic data in the U.S. and overseas that is generally improving, better earnings news from US companies, and growing hopes that policy will translate into even faster economic activity. Of those, I worry mainly about the policy. So much is being discounted into valuations now that it will be increasingly important that Congress and the White House show action quickly to back up the rhetoric. If legislation gets watered down or significantly delayed, or if policy focus turns more towards global trade restrictions, we could quickly see at least a short-term pullback in stocks.
Wadhwa: So this week marked President Trump’s first full week in office and he has embarked on some pretty protectionist measures. He pulled the US out of the TPP, and in a meeting with business leaders said he was going to impose a “very major border tax” on US companies that move overseas and export back into the US. There’s also his likely renegotiation of NAFTA. What is the impact of this and how do you think a more inward looking US will affect the global economy?
Patterson: We’ve been saying since well before the election that how the US economy and how the financial markets would fare under Trump would depend in part on which Trump we got — a President Trump focused on deregulation, tax reform and infrastructure or a trade focused Trump. Our view has been and continues to be that if Trump focuses relatively more on trade and getting more introspective as a country or inward looking as a country, we see a lot less upside for equities. In fact we could see quite a bit more downside risk.
Some of this I feel like is going to be a bit of a tango, we’ll take two steps forward, one step back. We may have a day where he has meetings and announcements on tax reforms and we’ll see equities rise and then we’ll have a day where he decides to have some aggressive rhetoric on trade and markets will consolidate ot sell-off. That’s largely the pattern we’ve been seeing since November 9th.
I think at the end of the day, as easy as it is to focus on the hour by hour, as there is so much news focus on this right now, you need to take a more medium to long-term view. So base case at the end of 2017, where do you think you’re going to be? We think, even though it’s not going to be happen in the first 100 days, by the end of this year we are going to get some kind of corporate tax reform. That is our base case. We think Congress is making it a priority because they know if they don’t deliver it, the mid-term elections are going to be a lot more tough for them. People expect it, and they’re going to be very disappointed if it doesn’t happen. So we do think you’re going to get some kind of tax reform, corporate, as individual is a lot more difficult.
We do think we’re going to get some deregulation, they announced Keystone. One could argue that’s less regulation around energy policy. So that’s all positive and we think that is, at the margin, going to be stimulative for the economy especially towards the end of the year and into 2018. And that will help support business confidence and hopefully actual business activity.
That said, we also do expect we are going to get some trade hits — the question to me is how aggressive is it and what actually happens. Trump had campaigned that he was going to have China called a currency manipulator on day one. And guess what, it didn’t happen. And I’m delighted it didn’t happen. To me, if that had happened, that would have been a major negative catalyst for global equity markets because a trade war with the second biggest economy in the world doesn’t end well. For anybody, including the United States. So I’m happy that didn’t happen.
Yes he announced he’s renegotiating NAFTA, but what does that look like? If it ends up being very modest changes, and it’s more of a marketing win rather than a huge economic change, then that negative for the markets isn’t that great. And Mexico probably wants this clarified as soon as possible so they can move forward. I could see them giving something to Trump so he can go back to his base and to the country and say “hey I got you a better deal, and it’s done.” And if Mexico can keep 85% or 90% of NAFTA benefits, and they can put this behind them and the peso is no longer in free fall, they’re happy too and so I think he can strike a deal there and probably get it done quite quickly.
If he can do things like that and avoid the border adjustment tax or a major trade war with China, I think that negative risk around Trump is at a minimum. So that’s my hope. The problem is you just don’t know. When you look at the people he’s appointed to key positions on trade, like Navarro, Leithauser, etc. they historically have been pretty tough on China, especially Navarro.
I think in terms of financial markets this year, policy direction is going to be very important. It’s something we all are going to have to keep following and understanding. How it evolves is going to be a major factor in how cyclical assets perform. If there is relatively more progress on tax reform and deregulation, it’s better for equities. If the trade stuff ends up being more marketing than real, I think that’s good news. What worries me is if you have a big trade effort like the border adjustment tax which ends up being stagflationary and/or a major trade issue with China. Those would be the risks I’m watching for.
Wadhwa: Markets as a whole have been rallying since Trump got elected, and there seems to be a lot of optimism for the economy right now. Do you agree with this reaction, or have we failed to price in the uncertainty you spoke about?
Patterson: I think the initial reaction to Trump was a repositioning. The consensus view going into the election, for good reason as that’s what all the polls were suggesting, was that Hillary was going to win and so people had gone in expecting an economy that was sort of the same — modest growth, equities chugging along slowly. When we got a different outcome, a lot of investors went to reposition their portfolios as quickly as possible. So we saw this huge rotation. And then once that positioning was largely done, everyone was kind of sitting on their hands waiting what to do next.
I think there is quite a bit of good news discounted in the market. Valuations are already high. Our view on equities is that we’re constructive but not euphoric. We’re neutral equities for a typical client versus our benchmark. So we’re not overweight stocks because we think the valuations are high. If Trump succeeds with tax reforms etc., then we probably also have higher wages, more inflation and the Fed tightens a little bit faster, and so we’re probably still looking at a recession during his term. At this point in the cycle, I would rather be neutral than overweight. And then within our positioning, focus on areas that should benefit if we do get the tax reform, but also think about what would we want to own if some of those risks play out.
We’re aggressively overweight US stocks. We have a tilt towards more domestically oriented names, more cyclical names, we’re quite overweight the dollar, but we haven’t abandoned the non-Trump trades, if you will. We still have a healthy amount of consumer staples in our portfolio. We still have some managed volatility strategies in our portfolio. We still have a modest degree of select non-US exposure in our portfolio, and what’s been fascinating to me is that the non-US and the non-Trump trades have outperformed. And that gets me back to the year being a tango. We’ll take a step forward and a step back. I think that’s going to be the story of the year. It’s just going to be a see-saw back and forth within the sectors.
Wadhwa: When you say non-US, are you looking towards Europe, Asia, the emerging markets? Where do you see value?
Patterson: We’re so overweight the US that mathematically we have to be underweight everything else. I’d say where we feel more strongly about the underweight is the UK. We think as the Brexit negotiations get going in earnest, you’re likely to see Sterling fall further, even from current levels. The Current Account Deficit there is enormous as a per cent of GDP, and they’re going to have a hard time attracting the capital flows to offset that. We also think that as Brexit negotiations get going and people see how difficult those are, business confidence in the UK is probably going to worsen.
With Europe, we’re less nervous. I want to love Europe. It’s killing me, not to love Europe. Because you’ve got a Central Bank that’s still easing, in contrast to the US, and you have much better equity valuations compared with the US. For the first time in a while we’re actually seeing some good economic momentum. So if you look at the business confidence surveys, consumer confidence surveys, bank lending, all these things are saying, ok you’ve got some positive momentum that could help corporate earnings here, which is great. With all of that, I should be buying this and not the US, but then you get to the election calendar, and you’re stopped dead in your tracks. Because the French election in April and May, it’s Brexit on steroids. Le Pen is highly unlikely to win the election, but now we’ve seen time after time after time polls can be wrong. She’s campaigned on exiting the euro currency block, and that to us is a much bigger deal than Brexit because it would throw into question the credibility of the entire single currency for Europe. So it’s a big enough risk that despite a lot of positives for continental European equities, we’re going to stay underweight. We have some exposure, but pretty minimal, and then we’ll see how that election story plays out. We might be late into it, but if she doesn’t win and you get someone a bit more centrist in that seat in May, you could have a really nice second half of the year for Europe, all else equal. So that’s an area we’re keeping a close eye on.
In Japan, the weakening yen with the strengthening dollar, all else equal, is good for Japanese stocks. Japan is very sensitive to US growth, so if the US is doing better, that tends to be good for Japan. Again we’re keeping a close eye on all of these trade talks, because if he doesn’t like weak currencies helping foreign economies — I see Japan in the crosshairs a little bit. So again underweight there but not as a strong a view as the UK.
With emerging markets, we’re just looking for selective companies which we think are less sensitive to possible trade situations under the Trump administration.
China is the one we care most about. Mexico needs America. 25% of their GDP comes from exports to America, so they don’t have a choice. If Trump wants to deal, they have to deal. China is not nearly as reliant on exports to America as Mexico is. So if we go after China, I don’t think they are just going to sit there and take it. They’re going to retaliate in some fashion. They could threaten to lighten the amount of US Treasuries they hold or they could devalue their currency to offset any tariffs we place on them. They could also retaliate in a more indirect way. It could be militarily in the South China Sea by taking a greater stand there for example. There’s lots of things they can do.
I think it was fascinating to see President Xi at Davos talking about how China is open for business. He sees an opportunity for China to strengthen its global footprint and its leadership role in the world. We’ll see how successful he is, but certainly with the trade agreement they’re working, ARCEP, he could end up benefitting greatly from this opportunity. But do we buy Chinese stocks? If we wake up and there’s a tweet about a Chinese manipulator or a Chinese tariff, the short term reaction is going to be China equities lower and greater expectations for a weaker renminbi. Then you’ll see the spillover effects to any country that has trade relations with China. That will include Asia but also a lot of the commodity exporters like Chile. It will have a global impact. The risk is great enough that even though there’s some interesting things going on with Asia right now, we’re just keeping our exposure modest and the security selection very selective.
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