Ask the Experts: Can Operation Twist Solve the US Economic Problems?
Oscar Pulido, Director and Product Specialist at BlackRock discusses the impact of operation twist by US Federal Reserve on the US economy and equity markets, as well as the worst case scenario of the European debt crisis and its implications.
While the operation twist is part of the solution to the US economic problems, Pulido believes that job creation remains the more important factor to save the US economy. US President Obama has proposed a 450 billion package to include tax breaks for employers and job creation in infrastructure sector, but uncertainties remain because the proposal has to go through the Congress where it may face some resistance from the opposing party. When the Fed announced the operation twist, it also gives insight in its minute that thereÃ¢ÂÂre still concerns about the economy. Nevertheless, Pulido thinks that now is a good time to look at stocks where valuations are very attractive, especially for investors having an investment horizon between 1 to 3 years.
As for the European debt crisis, it remains a very big question mark for many global investors. He expects the worst case scenario in Europe would be Greece to default in a disordered manner and cause concerns in other countries like Portugal and Ireland, maybe even Spain and Italy. However, thatÃ¢ÂÂs not necessarily the scenario that is the most likely.
From a valuation perspective, emerging markets equity looks more attractive than developed markets but they underperformed the latter because of liquidity reason. Nevertheless, fundamentals and valuations look better in EM, and Pulido is of the opinion that now is the time for people to start re-looking at EM equities on a longer term basis. He expects risk appetite to come back some time before the end of the year but it is difficult to predict whether it will happen in the next week or month. In the meantime, he adopts the strategy of diversification, rebalancing and maintains flexibility in the portfolio and he expects that for longer term investors, the ability to rebalance right now towards areas like equity markets will ultimately be rewarding in the future.
1. US Federal Reserve just announced the operation twist. Can it solve the US economic problem? Why?
2. What implication does it have on equity markets?
3. As for the European debt crisis, what do you expect as the worst case scenario? Do you think this has already been priced-in in the equity market?
4. Judging from fundamentals, investors should be investing into GEMs where valuations are attractive now, but we are seeing the opposite so far this year. Why?
5. Would you expect market risk appetite to reverse in the short term?
6. What is your investment strategy during turbulent times like now?
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