You’re better off evacuating before than escaping after: CIO on debt and the economy
Rupal Bhansali, Ariel Investments CIO International & Global Equities joins the On the Move panel to discuss the impact of COVID-19 on the markets.
Video Transcript
JULIE HYMAN: Thank you for joining us. We learned today that Japan would be getting a new prime minister. We knew that they were getting a new prime minister. We learned that the new prime minister would be Yoshihide Suga. And I'm just curious, as you look around the globe and compare the attractiveness of various markets to the United States, how Japan looks to you, particularly amidst this leadership transition.
RUPAL BHANSALI: Well, Japan, like most markets, are actually very expensive, in particular because the market's valuations are pushed up by flows, not by fundamentals. The GPIF, which is the government arm that buys equities and has been buying ETFs in the market, in my opinion, rather, indiscriminately is supporting the market artificially. So valuations are quite excessive.
Now, like in any market, there's always a handful of opportunities. You don't need hundreds of stocks to make good returns. And those exist in Japan, just as they do in other markets. But by and large, since your question is on the markets, I think they're very rich and not for my blood, for sure.
ADAM SHAPIRO: Good to see you again. It's Adam here. And I'm curious, everyone talks about the world being awash with debt. And you actually say "like a dam that will burst" because of the sheer pressure building up.
I'm the generation that absolutely believes what you've just said is true. The sky is falling. And yet it hasn't. I mean, I can talk-- we can go back decades where we've talked about debt's going to destroy us. And it hasn't. So why is this going to be different?
RUPAL BHANSALI: So I think the difference is that things tend to be cumulative. And we've reach debt levels to GDP, debt levels to EBITDA, all the metrics that we should look at are in territory that can represent the tipping point. So a dam can hold off a lot of pressure building up. I mean, that's what a dam is supposed to do. But if you overflow it beyond a point, beyond what its capacity is, it's definitely going to burst.
And my approach to investing is you're better off evacuating before rather than trying to escape after. So the Fed has just given us an enormous backstop on all sorts of distressed paper and indebted paper. Take advantage of it. Get out of highly indebted companies or indebted stocks and go into net cash companies.
ADAM SHAPIRO: But, as you've said, the Fed is there as the backstop. I never want to see the day when we find out that the Fed can keep printing and buying. But that's a long way off, isn't it?
RUPAL BHANSALI: So investing is a marathon, not a sprint. So you're right, you sometimes have to lose the battle to win the war. This is the argument people made in 2000, when Greenspan printed a lot of money and took the NASDAQ off to levels that were completely unwarranted. And then, of course, that dam burst, to the detriment of a lot of investors who piled in exactly for the wrong reasons-- the fear of missing out.
So I think we've seen these playbooks before. I've covered markets for 30 years around the world. If money could end all problems, we wouldn't have problems.
JARED BLIKRE: Jared Blikre here. Just kind of continuing the conversation about debt, I want to talk about the US dollar and its impact on your valuation thesis for global stocks here, because we've seen it depressed, but really just kind of trading sideways against the basket of currencies over the last six weeks. Still a crowded trade to the short side. What are your views on the dollar here?
RUPAL BHANSALI: Well, I think currencies are a fool's errand to call in the short run. But in the long run, they have to purport to arithmetic of [INAUDIBLE] on deficits. And the US perpetually runs [INAUDIBLE] deficit, which means it needs to attract capital into the country. In the past it did so, because it was still inflation and [INAUDIBLE] differentials. And now those have converged to extremely low levels, which creates pressure on the currency to adjust.
So I think from a secular basis, I would see the DXC continuing its downward trend. I think the peak has already been reached and is behind us. And I would say that also should actually help international markets perform better than US markets, because that tends to be a big source of dollarized returns. History has shown that, and I see no difference in the future compared to the past.
JULIE HYMAN: Rupal, good to see you. Thank you so much. Rupal Bhansali is Ariel Investments CIO of International and Global Equities. Appreciate it.