Loomis Sayles portfolio managers discuss the impacts of Japanese monetary stimulus

Dan Fuss
Dan Fuss

Loomis Sayles portfolio managers David Rolley and Kevin Kearns support the Bank of Japan's monetary stimulus program, but with different views of an optimistic outcome.

Domestic bond purchases by the Bank of Japan are pushing Japanese institutional investors — particularly insurance companies — to seek yield in foreign debt, according to Mr. Rolley, speaking at a luncheon for media April 10.

"It is not so much what the Bank of Japan is going to buy, we know that," Mr. Rolley said. The question is, "all the money that Japanese institutional investors will receive when their bonds are bought by the Bank of Japan — what are they going to spend that money on?"

The debt of European and emerging market nations are likely the ultimate beneficiaries of the Bank of Japan's stimulus as Japanese investors seek yield outside of their home market, Mr. Rolley said. The yields on German and French government debt have fallen as a result of Japanese monetary stimulus, Mr. Rolley explained. Emerging market nations' government bonds including Indonesia, South Africa and Turkey are other potential beneficiaries of Japanese investors' search for yield abroad.

"Investors will generally buy big liquid things where they know where they are on the map," Mr. Rolley said.

Using the analogy of the global economy as an intensive-care patient, Mr. Rolley said the Bank of Japan is like a second nurse coming to help where the Federal Reserve was the only caretaker of the patient until now.

The Bank of Japan's stimulus is on par with the size of the Fed's current round of quantitative easing, Mr. Rolley said.

Likening the global economic recovery to a baseball game, Mr. Kearns said it is only in the third inning, with a lot of the game left to play.

Noting that the Japanese have attempted, unsuccessfully, to vanquish deflation at least four other times since 1995, Mr. Kearns offered a more pessimistic outlook than Mr. Rolley.

Most notable was his worry about volatility. With the central banks of countries like the U.S. and Japan using all the tools at their disposal to fix their economies, volatility will persist and spike from time to time for the next five years, he said.

"There is a lot of hope that central banks can engineer this perfectly, and history tells us that there are going to be some bumps in the road," Mr. Kearns said.

On the bright side, Mr. Kearns said advances in the energy industry, especially natural gas, offer an opportunity for economic recovery in the United States.

Dan Fuss, Loomis' vice chairman and veteran portfolio manager and the event's headliner, kept his presentation short because "there is not a great deal to say about bonds."

He said that he does not know when the Federal Reserve might back off from buying bonds and explained the central bank's timing might be driven by other than market or economic forces.

In order to understand the Fed's behavior, you must realize that it is a creature of Congress therefore the Fed doesn't necessarily behave as economic thinking might predict, he explained.

Mr. Fuss did offer the opinion that when the Fed allowed the yield on 10-year Treasuries to inch up to 2%, it was a possible sign that the Fed may pull back some quantitative easing.

"When the day comes when they let it go from 2% to 2.2%, then I would say that barring something major we are into the rise in interest rates," said Mr. Fuss.

Also participating in the presentation was Aziz Hamzaogullari, a vice president and large-cap portfolio manager. He was the only speaker who didn't talk about quantitative easing, but instead discussed the two companies in his portfolio on which he's most bullish: Amazon.com Inc. and Visa Inc. Both share important attributes like market leadership, high barriers to entry and strong growth potential, noted Mr. Hamzaogullari. 