Beyond Bulls & Bears

A Rally Rooted in Recovery

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In the midst of a spring stock market surge sweeping some spots on the global map – notably the US – some investors have been left scratching their heads, wondering just what it is the equity market is celebrating. True, the US economy has

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been improving in some areas, but is it enough to justify the hoopla—and keep the market from back-sliding at the first hint of trouble? Peter Langerman, chairman, president and chief executive officer of Mutual Series®, believes today’s US market euphoria is actually rational because it’s based on improving fundamentals. US unemployment has continued to decline in 2013 and home sales have climbed, boosting consumer confidence. With low interest rates added to that mix, many investors have mustered the confidence to move their money into – or back into – stocks. That said, the US economy isn’t firing on all cylinders, and still faces an uphill debt battle and a dysfunctional Congress, inspiring naysayers to resurrect former US Federal Reserve Chairman Allan Greenspan’s infamous term “irrational exuberance” to describe current market conditions. Langerman’s response: “I don’t think we are quite at ‘irrational exuberance’ levels. At the same time, we have had a tremendous and dramatic move in the short term. It does, on certain days, feel like people are reaching a bit. We’ve all heard talk about a lot of cash on the sidelines, but at the same time, people are worried about being left behind. I’d say valuations have moved up, generally, but I don’t think we are quite in an extreme danger zone.” [perfect_quotes id=”1445″] Some investors may still have unpleasant memories of the 2007 market peak, worrying that they’re too late to the party and the market has nowhere to go but down. You can’t blame investors for being skittish, but Langerman doesn’t buy into a doomsday scenario, explaining that the near- to intermediate-term risks that could potentially lead the economy to fall off a cliff “seem to be off the table.”

Peter Langerman
“The notion that we are going to wake up to the apocalypse is much less likely now. Things have improved, although you can never say never. We have always been of the belief that you can’t time markets. Are we going to see a correction in the near term? It’s possible, but I think the fundamentals are such that if you’re prudent and you’re not trying to time the markets, it’s certainly not an unreasonable time to consider increasing your exposure if you have been reluctant to be in the equity markets.” You might think the rising stock market has posed a challenge for the Mutual Series’ deep-value approach, because bargains can be harder to find as valuations climb. But, because he takes a bottom-up approach, Langerman says “there are always opportunities,” particularly in underappreciated companies with good fundamentals, and long-term potential. But his team isn’t one to follow the crowds. ““We’d rather be buyers [of a stock] in the face of what seems like bad news than buyers when everybody loves it and it’s on the upswing.” Europe Lags Behind—For Now Across the Atlantic in Europe, investors have perhaps felt more irrational despair than exuberance. There have been shots of moderately positive news, notably in Europe’s largest economy, Germany, which eked out a 0.1% gain in GDP in the first quarter of 2013. Much of the continent is still mired in recession, however, including the 27-member European Union. Still, with the European Central Bank delivering a steady stream of stimulative measures, Langerman is more optimistic than not for the region. “The central banks not only in Europe but worldwide now, including Japan, have all joined forces in a sense to try to stimulate their economies. Europe is a bit behind the US in terms of coming out of recession, so policymakers are doing what they can following on comments and actions taken last year. We have been reasonably positive in terms of our view on Europe; that Europe wouldn’t be as bad as the worst case predictions. Not that the [economic] numbers are wonderful, but they are not as disastrous as they had been, so we think that pattern should continue.” Despite the uncertainty, Langerman says he and his team are “not sitting on our hands,” and he’s actively looking for opportunities in Europe. And those opportunities include both Europe-based companies and those that export their products to Europe. “There’s a fair bit of good news built into a lot of the valuations these days. We are being prudent, but that doesn’t mean that we are not doing anything. First and foremost in our minds are those compelling valuations. So we have things to do, but you just have to be a little bit careful and cautious these days.” Prudent exuberance, anyone? [php function = 1] Get more perspectives from Franklin Templeton Investments delivered to your inbox. Subscribe to the Beyond Bulls & Bears blog. Get more timely insights. Follow us on Twitter @FTI_Global and on LinkedIn. All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investing in companies engaged in mergers, reorganizations or liquidations involves special risks, as pending deals may not be completed on time or on favorable terms, as well as lower-rated bonds, which entail higher credit risk. Current political uncertainty surrounding the European Union (EU) and its membership may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries may increase the economic risk of investing in companies in Europe.