Smartphones, emerging markets are pockets of value in today's market

Investment experts worry about the longevity of the bull market

May 23, 2018 @ 4:27 pm

By John Waggoner

Worried about rising volatility and the potential end of the bull market? Look no farther than your cellphone.

A panel of three experts at the Investment Company Institute's general membership meeting in Washington agreed that sooner or later — probably sooner — the economic recovery will falter.

"It's coming within 12 months, we'd guess," said Sarah Ketterer, CEO of Causeway Capital Management. The other members on the panel were Theresa Kong, a portfolio manager at Matthews Asia, and Rupal Bhansali, chief investment officer for international and global equities at Ariel Investments. Marie Chandoha, CEO of Charles Schwab Investment Management, moderated the panel.

"The markets speak ahead of the economy — one has to be vigilant now, given that the easy money has been made," Ms. Bhansali said. "You have to be very selective in portfolio construction."

Ariel, a value shop, has been finding good value in wireless phone companies. "I would argue that wireless telephones are the new consumer staple — people can live without shampoo, but not without a smartphone," Ms. Bhansali said. "Having wireless is like having electricity in the house."

Many of the wireless stocks have taken big hits because telephone companies are viewed as utilities, and therefore vulnerable to rising interest rates. Ms. Bhansali pointed out that their valuations are "at multiyear lows." But rather than view telephone companies as interest-rate sensitive stocks, "I'd argue that they are just busineses," she said.

Should rising rates result in an economic contraction, investors in wireless stocks will at least get some return upfront, in the form of dividends, Ms. Ketterer said. "Essentially, you're getting a lower-duration stock," she said.

One example: Verizon, which currently is selling for 6.37 times trailing earnings and sports a dividend yield of 4.81%.

And while the major cellphone companies compete fiercely — and spend gobs of money on their networks — they have a reliable customer base. "People will pay their cellphone bills before their auto payments," Ms. Chandoha said.

Good values aren't available only in the cellphone industry, the panel said. For example, while the world markets are unusually synchronized now, they may not continue to move in lockstep, which means there could be attractive investment opportunities overseas.

"The U.S. market still has to get enough steam to get discouraged workers out of mom's basement," Ms. Kong said. Once that happens, they will buy more consumer goods — not just new cellphones, but furniture and autos, too.

"That means more imports from emerging markets, especially Asia," she said.

"From an equity perspective, China is awesome in numbers." Ms. Ketterer said. "China is already 30% of the MSCI Emerging Markets Index, and it's going to be about 40%."

And that's just on the passive side of the mutual fund industry. For both stock and bond investors, valuations are cheaper abroad, particularly in emerging markets bonds.

China's 10-year government bond yields 3.77% now, for example, while the Italian 10-year government bond yield is 2.39%. The difference: China has an AAA credit rating, while Italy has a BBB rating.

"Some developed countries are not as stable as one might assume." Ms. Kong said.


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