Templeton’s $42 Billion Manager Says The Gloom Has Gone Too Far

On China, she says the equity market is going through teething pains and it doesn’t say much about the underlying economy. Local investors were overexcited from the middle of 2014 and shares went too high, and now they’re too pessimistic, she said. The Shanghai Composite Index surged 151 percent from July 2014 to a peak last June. It’s since dropped 44 percent.

For Arnold, China’s slower expansion as it shifts to a services-oriented economy is a normal transition, albeit one made more volatile by high levels of debt. Her view contrasts with billionaire investor George Soros, who said on Thursday that the world’s second-biggest economy is facing a hard landing that will contribute to global deflationary pressures, prompting him to wager against U.S. stocks.

Currency Wars

Fears that China’s weakening of the yuan is an act of competitive devaluation are off the mark, according to Arnold. The yuan dropped 1.5 percent in the first week of January, fueling concern about policy intentions. In Davos this week, China’s vice president underlined the Communist leadership’s pledge to avoid pursuing devaluation.

“This is more taking pressure off a currency that was continuing to move ever higher as their economy was weakening,” she said.

At the heart of the worldwide stock rout this year has been oil, which plunged to its lowest level in 12 years. Crude markets could “drown in oversupply,” sending prices even lower, according to the International Energy Agency, which trimmed its 2016 estimates of global demand for the commodity this week. This too will pass, according to Arnold, who says demand for oil is quite price-sensitive, while growth in supply will probably slow this year as the U.S. and other non-OPEC countries scale back production.

“The lower it falls, the more the rest of us decide to drive,” she said. “This is a self-correcting problem.”

Fully Valued

Arnold is underweight U.S. stocks. While the market is “fully valued,” the economy has room to expand, she said. Growth will be driven by the consumer, she said, even as companies face headwinds such as rising wages and dollar strength.

Not everything seems rosy for Arnold. Like China, developed economies have too much debt after the financial crisis, and the recovery will be slow.

“We should expect growth to remain quite anemic wherever we look, but that doesn’t mean we’re about to fall off a cliff,” she said. “Whenever we see lots and lots of skepticism and fear and loathing in markets, that’s never historically been signs of a top.”