Jim Paulsen, chief investment strategist of Wells Capital Management – the institutional investment manage firm with Wells Fargo Bank, N. A. as a parent firm, it manages 350 billion dollars – says that the European economy will increase vigorously this year. This is why for many American and overseas investors the European stock markets will be appreciated: both the majority of European shares and the exchange rate of the euro are going to get stronger this year. Paulsen predicts that the euro will reach the 1.20 – against – dollar level by early summer.
He suggests buying not only European shares but also raw materials; he believes that the upcoming steady European, American, and global growth will increase the price of industrial raw materials as well.
However, Paulsen also thinks that ECB’s great bond purchasing programme is unnecessary and harmful, just like he shared this opinion on QE, the money printing project of Fed. His main point is: the current positive processes have been triggered by the market, making every governmental and central bank interventions an unnecessary wasting of money.
Péter Zentai: It seems like you and the majority of the American investors are not bothered by the challenges of world politics. Every time I am listening to you on CNBC or read your articles in the Wall Street Journal, I always notice you never even mention – for example – the news of the Russian-Ukrainian war or the developments of the Greek situation. Why do these events go unnoticed by you and the other American investors?
Jim Paulsen: They do not go unnoticed. However, there have always been geopolitical challenges, and political conflicts. If we concentrated on them, we would never dare to invest, while private and corporate investors entrust us with hundreds of billions to generate profit from these tremendous amount of money and from modest savings as well.
Would you recommend buying Greek or Russian goods to your colleagues?
Russia is no doubt one of the most significant resource-rich, energy producer and exporter countries, and I strongly believe that in this year, the increasing demand on raw materials – and hence the prices as well – will be in central position. However, I would not focus on Russia. Why would I take unnecessary risks, when there is significantly less political and other issues endangering my commodity shares in Canada or Australia than in Russia?
As for Greece, whether there are problems or not, I would say Europe will definitely perform well this year.
All in all, I prefer Europe, Japan, and other stable raw material producer and exporter national economies as well, such as Australia or Canada.
You did not mention the United States. Even now, that the greatest conjuncture is in your country?
That exactly is the reason. There is no doubt, among the developed countries we, Americans are the best – so far.
However, the boost of the last one and a half year is starting to fade away, while Europe is certainly going to catch up…
Don’t you sense a danger for deflation?
No. And it is not only me, but also most of the great American investors think the same, that there is definitely going to be such a growth in Europe as there was in the USA in the last years.
If I happen to look around here in Minneapolis, the Midwestern United States, where I am currently visiting my parents, everything is developing. The unemployment rate fell below five percent, real estate prices have been increasing, and people are buying – a lot more than any time in the last couple of years. This is now the overall tendency in the whole United States.
Do you think this situation cannot improve significantly?
I think that this current standard will be stabilized. I estimate a three-four percent increase of GDP. Compared to this, the zero interest rate environment is an absurdity. In other words: the belief of inevitable interest rate increase will spread among market participants. And the Fed will certainly do that.
However, Europe is still far from that…
Yes. There, the zero interest rate will remain – for long. Europe is in a phase delay, it is lagging behind with three years – in reducing interest rates, triggering decrease in bond yields, and in pushing further the exchange rate of the euro.
According to this, Fed did well when it flooded the market with new money; and now ECB reproduces it efficiently?
The QEs have been unnecessary in both America, and – especially now – in Europe. Not the central banks, but the self-healing ability of the market and the economy won. These forced interventions caused more harm than good. Actually, they have not helped at all. This economic liveliness, what I see in the United States, would have occurred anyway. It did start in 2011, before the intervention of Fed. This is the same situation in Europe. In 2012, ECB did well by initiating great reductions in interest rates. As a result, the natural market processes started: most importantly, government bond yields could decrease all across the euro-zone. The decreasing bond yields followed by the falling exchange rate of euro – they all showed that things are getting back on track again in Europe. So I believe this government bond purchase programme by ECB is incapable of affecting those processes, making it unnecessary and risky.
Europe is on its way to recovery, but not by the QE of the central bank, but the market’s ‘QE’. In the end, the fall of oil prices meant the most efficient and most significant qualitative easing. It was on par with a global tax reduction. Prior to that, the euro was considerably weakened, and the government bond yields were dramatically decreased. These three factors – fall of oil prices, decreased bond yields, and the weak euro – predestinate Europe to a stable growth.
Will Europe recover this year; and since the zero interest remains, will the euro weaken any further against the dollar? Because – as you said – Fed will increase interest rates.
I say, Europe will start recovering; not that the euro will become weaker! It is exactly the opposite: soon the euro will get stronger. Not in the upcoming weeks, because in such a short term, I think it is possible that the euro will be on parity with the dollar. However, I am sure about that, by early summer, the euro will reach 1.20 dollars.
Why would the euro become stronger?
Because recently – at least for American investors – growth prospects are in the focus of interest. While the American growth remains at the same – still satisfying – level, Europe – compared to its foregoing performance – will grow dramatically. The difference between the American and European growth will tighten. Because of the temporarily weak euro, the low bond yields, and the modest energy costs, I along with thousands of American investors – I think – are betting on Europe. All of us are starting to buy European shares on euro – which is cheaper than the dollar. The demand for the euro will increase – raising the exchange rate of the euro.
What is your opinion on gold, as a possible investment? Do you buy gold?
Gold is only interesting during inflation and deflation; but neither of them is happening now.
However, gold is a raw material, and I do believe that the global growth will increase the price of every commodity further. But it will increase rather the price of rubber, copper, tin, and other significant commodity requiring industrial use than gold’s. Gold – compared to those raw materials – is more unreliable. Why would we take unnecessary risks?
Something else, I can suggest: generally, I think emerging markets are good – be it Asian, Latin-American, or Middle-European. They will produce double growth on average, than the developed markets, even if China is slowing down. But this reduction is only six percent – in yearly growth. In the next years, America and Europe will increase with three percent on average, and the emerging ones – similarly to China – with six percent. However, the price-earnings ratio of growth rates in the emerging markets is around 12, while here in the United States it is around 18. That means, next to the European and Japanese, the stock markets of those emerging markets which are not too politically risky can also be favourable.