Portfolio Manager Perspectives

Jeff Benjamin

Fundamentals about to overtake momentum?

May 13, 2010 @ 12:04 pm

By Jeff Benjamin

The stock market has evolved into a tug of war between momentum and fundamentals, according to Christian Hviid, chief market strategist of Genworth Financial Asset Management.

“For the time being, momentum has been winning the battle, but the battle ain't over yet,” he said.

Even after last Thursday's stunning and brief 1,000-point dip by the Dow Jones Industrial Average, Mr. Hviid believes some investors are ignoring the “head winds” facing the market and the economy.

“Last week was a test that shook out many of the marginal investors, and I think prior to last week, complacency levels had set in,” he said. “I'm not as bullish as the market is right now.”

Mr. Hviid, whose firm has $7 billion under management, is currently favoring a barbell approach that balances U.S. equities with emerging-markets equities in favor of foreign developed markets, even though he's not comfortable with the state of the U.S. economic recovery.

“With the massive amount of deleveraging in place, the question is whether the recovery is sustainable,” he said. “In both Europe and the U.S., there has been a big safety net in the form of government spending, which means that 20% of all income has come in the form of government stimulus, and that's not sustainable going forward.”

Mr. Hviid said the biggest threat to the economic recovery is the “moderation of growth” that will come as a result of higher taxes and continued high unemployment levels.

“Local and state governments are in contraction mode, and unemployment weakness could last a long time,” he said. “These issues are real, and all in all, it's bad.”

The sovereign-debt issues facing Greece and several other European countries are symptomatic of the kinds of problems facing much of the developed world right now, he said.

“Right now, you have the haves and the have-nots,” he said, citing China as an example of a “have.”

“A country like China has large currency reserves and is in better fiscal shape, and that leads to greater flexibility in policymaking,” he said. “But it's almost like the markets just want to look at the good news.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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