Ed Perks: In the United States, we see faster growth potential—potential for higher earnings, higher cash flow and higher dividends. At the same time, we see more differentiation within sectors and among individual stocks. I think this environment is well suited for active managers like us to hopefully differentiate as we move forward during this cycle.
With the sharp improvement in business and consumer sentiment—among other factors—markets generally have been embracing a bit of a reflation trade and expectations for accelerating growth. I think we are starting to see a change in perception of what companies will ultimately deliver in terms of their ability to maintain attractive profit margins, in conjunction with positive potential policy shifts, including lower taxes and reduced business regulation.
We think US stocks on a relative basis still have a pretty strong appeal, and we acknowledge there is potential for further upside, but not without risks we need to monitor. Reflation can be positive, but there is another side to that coin; inflation, rising input costs and rising wage pressures all can be problematic and offset some of the positive aspects.
Globally, on the equity side, there has been underperformance in a number of regions versus the United States, and valuations are generally a bit lower, which we find interesting. I think the expectations are also quite low. Strong multinationals playing broad themes with exposure to the US economy and to emerging-market economies look interesting to us.
Sonal Desai: Looking broadly across the globe, we believe many people are overestimating the negative or catastrophic impact of trade policy on emerging markets. There are still many, many potential opportunities there, in our view.
Touching on Latin America, we view it as a region that experienced a wave of populism similar to what we are now seeing in several developed countries—except they went through it 10 years ago. We are now seeing a move away from populism in some of these countries, including Argentina and Brazil.
Then there are countries like Mexico and Colombia, which never really went in that direction and have just had an extended period of extremely good policies. We see attractive opportunities at attractive valuations in many parts of Latin America.
We are taking the risks of populism quite seriously. I think most people are, to some extent, underestimating how important this current wave of populism is. The driver of this wave of populism—immigration—is an immediate issue for the average person, not something esoteric like budget deficits. Immigration is a big issue across Europe right now.
We think policies in the euro area will likely have to adjust a bit to this wave of populism. In terms of how disruptive it will be for the markets, I think the coming few months should let us know.