Morningstar Advisor - June/July 2012 - (Page 53)

Michael Hasenstab Senior vice president, Franklin Templeton Investments [Ireland’s] model of taking short-term pain, dealing with the deficit head on, being focused on making your economy competitive on the growth side, I think those lessons can be applied to many countries. We liked all of those things. Then came the period when they were downgraded, and there was a real market panic in July 2011. We were comfortable with the long-term fundamentals and finally the market reached a distress level that gave us an entry point. From the summer onwards, we were taking a position. It’s very characteristic of things that we look for. We look for something that everyone hates, and we look for something that in the long term has good macro-fundamentals, even if in the short term it may be a little bit volatile. But if we can feel comfortable long term that Ireland is money good, that they have the right policy prescription in place, and that they can actually execute that prescription because there’s the social cohesion to do so, we’re comfortable taking contrarian positions. The other thing I would say about Ireland, although it’s a small country and there are unique situations there, is that their approach to the crisis can be very instructive for other countries in Europe and, frankly, for us here in the U.S. When we look at the debt crisis, it’s about debt ratios relative to GDP. It’s about the stock of debt as well as the growth rate. Ireland is dealing with both of those issues—both the numerator and the denominator. They are dealing with the debt issues by aggressively tackling fiscal reform and getting a handle on budget deficits, rather than procrastinating. They are doing a very good job on their deficit management, something clearly we’re not even touching here in the U.S. But they didn’t put in place policy measures that would jeopardize their growth prospect even though there was a lot of pressure from the Europeans to increase their taxes. They didn’t. So, they kept their economy really competitive. They also took a lot of pain in terms of making adjustments to get competitive again. Unit labor costs in Ireland in the manufacturing sector were cut by over 20%. But by taking that upfront pain, they were able to get competitive again, export again, and then in the medium to long term, people’s livelihoods will be improved. That model of taking short-term pain, dealing with the deficit head-on, being focused on making your economy competitive on the growth side— I think those lessons can be applied to many countries. Even though Ireland’s small, I don’t see why those lessons are not applicable to the U.S. or other European countries. Fuss: Yes, they dealt with their debt issues quickly. They significantly lowered unit labor costs and were committed to low corporate tax rates, which gives companies incentive to invest. Those and an educated workforce were some of the main characteristics of the situation that looked attractive to us. All of these qualities are unique to Ireland, when measured against euro-area countries. Sjoblom: How do you look at policy risk around the globe? Where do you see the most potential for policymakers to get it wrong? Hasenstab: Well, we’re already getting it wrong in the U.S. The lack of progress on the fiscal side is pretty clear. Policy implementation is going to be critical. For example, in Europe, there is a need to follow through with plans for a more constrained fiscal union so that they’re not allowed to have a repeat of the overspending that has happened in the past. The challenge in emerging markets will be staying ahead of the curve. They’ve done a very good job so far. They certainly did a good job in 2009, 2010, as their economies recovered, obviously a lot faster than the developed world. They had to lead the interest-rate cycle. The Fed, in continuing to ease, was doing nothing, but many of these countries started tightening, which is a very different dynamic than we’ve experienced before, when most emerging markets followed the Fed. This time, they led the Fed. But it’s important that they continue to demonstrate that, because the growth dynamics in many emerging markets are very different than what we’re experiencing in the U.S. or what’s being experienced in Europe. We’re already starting to see early signs of inflation in some emerging markets that you clearly are not witnessing here in the U.S. So staying ahead of the curve—tightening policy to prevent inflation from becoming a problem—will be important for emergingmarkets policymakers. There are three main policy components: exchange-rate policy, interest-rate policy, as well as fiscal policy. A good example is Malaysia. They were pre-emptive on interest rates, being one of the first countries to tighten. They’ve been fairly flexible on the exchange rate, allowing it to appreciate MorningstarAdvisor.com 53 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - June/July 2012

Morningstar Advisor - June/July 2012
Contributors
Letter From the Editor
Be Worth Remarking About
How Important Is Stewardship?
From West Point to Points East
Where a Fund’s Secrets Lie
Getting Fund Directors on Board
Managers Prep for Housing Rebound
Four Picks for the Present
Investment Briefs
A Hedge Against Career Risk
Natural Gas Reaches Capitulation
Family Matters
How Good Stewardship Predicts Superior Performance
Stewardship Goes Back to the Fundamentals
On the Go for Fixed Income
Where Shareholders Ride First Class
Dangers Lurk in Exchange-Traded Notes
Stocks on Sale in a Strong Market
A Good Steward Is Easy to Find
Our Favorite Mutual Funds
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
Buffett Rule’s Biggest Losers

Morningstar Advisor - June/July 2012