Bessemer Trust
Business Insider recently caught up with Rebecca Patterson, the chief investment officer of Bessemer Trust, to hear about her outlook for the global economy in 2017.
Bessemer Trust, a privately owned wealth and investment management firm, oversees more than $100 billion in assets.
Patterson was the former Chief Markets Strategist for JPMorgan Asset Management and former Global Head of Foreign Exchange and Commodities for the JPMorgan Private Bank. She started her career in journalism as a reporter for Dow Jones in London.
She is a member of the Council on Foreign Relations, the New York Federal Reserve's Investor Advisory Committee and the Economic Club of New York. American Banker named her one of "The 25 Most Powerful Women in Finance" in 2014, 2015, and 2016.
In the interview, Patterson discusses dollar strength, bond volatility and how investors can protect themselves in 2017.
This is part three of a three-part series. Part one was a discussion on protectionism, China, and Dow 20k. Part two featured Patterson's advice for young Wall Streeters.
This interview has been edited for clarity and length.
Tina Wadhwa: Given everything you've spoken about on European elections and the risk with China, how do investors protect themselves from all of the uncertainty and potential volatility going into this year?
Rebecca Patterson: Ironically it's one of the reasons that we're overweight US assets. If we do get all of the stimulus that Trump campaigned on, and the US economy does better, and the Fed raises rates more, all else equal we think that probably benefits the dollar and benefits cyclically oriented US companies. So that's good news for the US equities market all else equal. But if something bad occurs, like a trade war with China (which is not our base case at all), I think that US equities would fall, but because of Americans' home bias when it comes to investing and because of the likely capital flow into US money markets and cash for safety, which would push up the dollar, US equities will probably hold up at least as well as foreign markets. Usually in risk events, even if the risk event is US caused, like our debt downgrade in 2011, US markets tend to do better than overseas, because they're more liquid and the dollar tends to benefit in risk off environments. So it helps your total return in dollars versus in overseas currencies. Having a lot in the US isn't just a huge bet on the new administration succeeding, it's also defensive. So that's one thing we're doing. But you do have to know, that's going to be the lower volatility types of securities in your portfolios, that won't be the small cap or the cyclicals.
The other thing we're doing is not abandoning bonds. I think there was a bit of anxiety among a lot of investors at the end of the year when the Trump election resulted in a repricing of interest rate changes over the coming year and bonds sold off. People saw a negative number next to their bond portfolio returns for the first time in a very long time.
But going forward, our base case is that while the Fed will tighten, bond yields should rise slowly enough that you can get a positive return on your bonds. So bonds, we feel, even with the Fed hiking, can still play an important role in a portfolio to give you protection against some of these risks. We also have some credit holdings with floating rate debt that should be less volatile than equities, more volatile than your traditional bonds and munis, but also benefit if the shock is the Fed hiking faster than expected.
And then good old fashioned diversification. Some of the lower volatility strategies got hurt after the Trump election, but it depends on how they're built. Some people consider low vol just high dividend stocks, and I think that's way over simplified. You can create baskets of stocks and if those stocks are different enough securities, either because of sector, company, type of business, or country, you could get lower volatility through the diversification of those holdings, and that's generally what we do at Bessemer. So we build these lower volatility baskets, we rebalance them regularly, partly on valuation, and for the last five years, they've made about 10% a year with 60% of global equity volatility. So even though I'm hopeful about Trump and the new administration and some of the stimulus, we have not lightened up on these strategies. They're going to help us if something goes off plan or risk emerges that maybe we can't even foresee.
So bonds, low vol strategies, credit, and a little diversification within the stocks you have.
Wadhwa: What's your view on dollar strength going into 2017? On Monday Treasury Secretary Steven Mnuchin said that "from time to time, an excessively strong dollar may have negative short-term implications on the economy". How do you see this playing out?
Peterson: I think he was in a difficult situation because his new boss just made comments about the dollar being too strong a few days earlier. So how does he thread the needle of sticking to what Treasury has been saying for the last few decades without disagreeing publicly with his new boss? So I thought he handled that well.
In terms of the dollar, our base case is that the broad dollar (so I'm not talking about the DXY, I'm talking about the trade weighted dollar) does continue to strengthen this year. And part of that is because the Fed is still tightening versus other major central banks (especially the ECB and Bank of Japan which are still easing), part of it is our view that as part of this tax reform we'll get something that at least encourages repatriation which would be dollar positive all else equal, and if we have some positive stimulus in the US economy, that could attract more capital here. We think there is upside to the dollar, but the dollar is already getting very highly valued. The dollar is only a couple percent away from the highest level it's been since it started floating in the 1970s. It doesn't mean it can't go further, but it's getting rich. So we think further upside from here is probably a little more gradual. Then if the ECB starts tapering later this year or announces that it is moving in that direction, that's going to change the math a little bit. Then another thing we'll watch, which could affect the degree of the move one way or another, is who Trump puts in the vacant Fed seats. And then later this year if we start seeing speculation around who might replace Janet Yellen if indeed he is not going to rename her as chair in Feb 2018. If the perception is that we're going to get more hawkish Fed members, that could extend the dollar's gain further. If we get someone who's not more hawkish than the current Fed, that would suggest relatively less dollar strength. Overall we're still bullish on the dollar, but not aggressively so at this point. It's already moved a lot.
Wadhwa: What are the big themes of the moment? What are you worried about, what are you excited about?
Peterson: I'm always worried about what I'm missing. I'm always worried most about the thing I'm not catching.
I do worry about bond market volatility later this year with the Fed appointments. Remember it was August 2015 and there were worries about who was going to take over from Bernanke. There was a lot of disagreement whether it would be Larry Summers, Janet Yellen, or someone else, and the bond market volatility exacerbated the equity market volatility at the time. People are pricing in the risk of trade problems, the risk of equities, pricing in a lot of good news. I don't think the market is adequately focused yet on the possible bond volatility we could get later this year. And then the French election - everyone is aware of it, everyone knows it coming, that's not going to be a shock, but if it actually plays out that Le Pen wins, I'm not sure if investors are adequately aware of the negative and broad implications that could have.
I worry about Russia in that Putin has proven for several years now that he is good at seizing opportunities. If you had another rush of migrants into Europe this spring, if you had other events that could tilt elections in a way that creates more question marks around the strength of the European Union or the European currency bloc, that definitely works to Russia's advantage. A weaker Europe is good for Russia. Not weaker economically but weaker politically. And so that is definitely something that I think about a lot in terms of risks that we have to watch out for this year.
Wadhwa: What about things that you are optimistic about or excited about this year, just to end on a positive note?
Peterson: We've been going for so long with mediocre growth, and if you look at business confidence surveys, we're seeing less red and more green. Emerging markets are trailing, but even they have improved on a relative basis. Europe has some real momentum. China I think in part because of their party congress this fall is going to try really hard to keep growth relatively stable this year. So if you have a stable China, an improving US, barring a France shock hopefully you have an improving Europe, you could have some decent global growth this year - and that would be welcome. It's going to help companies and it's going to hopefully help political leaders, because if your voters have money in their pockets, they tend to be less grumpy about other things. So that's a good thing, and that started before the election. We started seeing that happening really in September/October, and I'm sure commodity prices stabilizing has helped, but it's more than that. So that to me is something one shouldn't overlook. It's so easy to get fixated on US politics right now b/c it's such a new world, but the underlying economic momentum in the US, Europe and elsewhere that started even before the election is now being reinforced after the election. And that's great, that's really good news.
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