Cyclicals couldn't be better positioned now for economic recovery: Causeway Capital Managment CEO
Sarah Ketterer, Causeway Capital Management CEO, joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss how coronavirus has impacted the markets.
Video Transcript
BRIAN SOZZI: I want to bring in Sarah Ketterer, Causeway Capital Management CEO. Sarah, good to see you here. Thanks for taking a few minutes. I was looking over your Global Value Fund, and there's a lot of industrial names in that fund. Why that play right now?
SARAH KETTERER: Cyclicals couldn't be better positioned now for economic recovery. And your viewers must say, recovery? We haven't even gotten to the depths of the recession. But that's precisely the time you want to own cyclical stocks based on history, whether they be industrials or the banks. They tend to respond very well. They anticipate economic recovery before we even see it in the data.
And so many of those industrials have been at the epicenter of the coronavirus pain, and therefore they've sold off the most. They will have the greatest rebound. My colleagues and I are convinced in that.
ALEXIS CHRISTOFOROUS: You know, Sarah, a couple weeks ago you predicted that we would see a rebound in the markets by mid to late April. Are you still sticking to that timeline?
SARAH KETTERER: Yes we are, and the reason why is because of the experience in China. So to the degree that when the cases-- the coronavirus cases peak, markets tend to respond very favorably. And it looks to us, based on what happened in Asia, if you take that experience to Europe, that Europe may see its cases peak around mid April and the US around the end of the month, which is interesting how it coincides with all these lockdowns that are prescribed to the end of April or 1st of May, and markets will anticipate all of that.
But you can't buy the cyclical stocks after that. It will be too late. And all those who are owning the defensives and hiding out in health care and buying the grocery chains, they won't be able to switch their portfolios fast enough.
BRIAN SOZZI: So, Sarah, you say that this is the best buying opportunity right now since the financial crisis of 2008. How can someone protect their portfolio and not be overexposed in some of the areas you were just talking about like, say, grocery, supermarket chain-type stocks?
SARAH KETTERER: Well, diversification is useful in all parts of market cycles. So I wouldn't want my entire portfolio in industrials either nor in banks or in other cyclical elements or [? near ?] I say before I explode into flames, cruise lines, but they do belong in a portfolio that's well positioned for recovery because we will have recovery. And even though nobody seems to want to talk about it-- it's much more interesting to talk about the misery-- we will get beyond this. And again, equity markets will anticipate that, and we'll do this globally. Every market will. And the more cyclical the stock, likely the greatest snap back.
BRIAN SOZZI: Sarah, looking at some of your individual calls, I'm locked in on GE. It's a name we follow very closely here. Larry Culp, CEO of GE, by all indications a real strong manager, but why GE? That business I would think stands to be hammered because their cash flows-- I mean, they've been struggling for some time, but their cash flows I imagine under severe pressure because of that outsized exposure to the airline industry.
SARAH KETTERER: They do. In fact, they, within aerospace, represent one of the greatest pain points associated with coronavirus but also some of, again, the greatest upside. And that's one of their best businesses, and there's absolutely no reason why they can't make it through this cycle.
The key is not just buy cyclicals. Get those that have financial strength, and GE is in that category with several others. So you don't want to buy an overly financially leveraged business. Better to be in those like GE that have excellent management and the financial capability to get through this, assuming this is not going to last for 18 months but rather several quarters. That's critical.
ALEXIS CHRISTOFOROUS: Hey, Sarah, I want to talk about some of those taboo sectors. You mentioned cruise lines earlier such as Carnival. We've also got the aerospace industry. Both of those industries taking a huge hit right now, basically ground to a halt. Do you expose your portfolio to those companies, and if so, when and by how much?
SARAH KETTERER: Yeah. The time to buy them is now. You can get Norwegian Cruise lines at a fraction-- think about it. That's a stock that traded at $60 a share in January, and you can get it as low as $10 in market weakness. That's fantastic. Maybe you think it'll never get back to its former high, but it doesn't have to. You're going to get doubles, triples, quadruples out of these stocks.
This again is really quite remarkable how pessimistic the market has become, especially on a narrow group of stocks where you know people will be back on the cruise lines. These are fantastic experiences for consumers, and we simply just have to have the testing in place in order to keep people confident that they are not in harm's way.
BRIAN SOZZI: You know, Sarah, I suspect you talk to a lot of management teams of the companies you own. Who has impressed you the most? Because I think leadership during this crisis is very important, and those are the companies and leaders you want to bet on going forward.
SARAH KETTERER: Yeah. Well, we make a point of only buying into companies we consider run by great leaders. Otherwise we're-- on behalf of our clients, many of whom are large institution, not to mention our mutual-fund shareholders, then they're at the mercy of the winds in the industry. You need great management, and you mentioned Larry Culp at GE. We're really interested in other aerospace companies like Warren East who runs Rolls-Royce, the aircraft-engine manufacturer.
There are, across our portfolios, extraordinary CEOs and management teams who can take these businesses. They're in catering. Imagine this, bringing food into schools and hospitals and restaurants and bringing food into sports events, and now everything is shut down for them. You have to have great management to see your way through that.
Every single company-- and this is what great management is doing-- is preserving liquidity. They're ensuring they have enough in the way of funding to get through the crisis period, but they're also very candidly looking to see how their smaller competitors will be driven out of business. So for some of these companies, they're going to come out of this with an actually better position they were going in.
BRIAN SOZZI: All right, let's leave it there. Sarah Ketterer, Causeway Capital Management CEO, making a big call on the cruise lines this morning. We'll have to have you back on and see how this works out. Thank you.
SARAH KETTERER: Thank you.
