Momtchil Pojarliev
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Some Like It Hedged

BNP Asset Management's Pojarliev discusses a variety of options to address foreign currency exposures. Although there is no single best-practice solution for addressing foreign currency exposures, institutional investors have three main choices, he says.

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Amid changes in builder, do you think the CAT project will be completed by 2020?

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April 1, 2004

Omega Watches for Trouble

By Kathryn M. Welling

Lee: You can argue that stocks are cheap relative to interest rates, but I don't accept the notion that these current very low rates are sustainable. As Steve has pointed out in our written work, historically, the 10-year government bond rate is about in line with nominal GDP. So, if you've got a combination of 3 percent real, 2 percent inflation, that would suggest the bond rate belongs at 5 percent, not 3.75 percent, currently.

Steve: It's about 3.7, actually.

Lee: My own view is that P/Es are high relative to their history, and interest rates are low relative to their history. So it's logical to assume that over the next 12-18 months interest rates will be rising and P/Es will be declining. One of these days, rates will start to rise, creating real problems in the economy.

No matter how often Greenspan tells Congress not to worry.

Steve: To Greenspan, the glass is perpetually, at a minimum, half full.

Of bubbly.

Steve: The one thing he is concerned about, interestingly, is the federal budget deficit. And they're the only ones who can print money. I think Greenspan has been hopeful that there will be a bridge from asset price inflation to employment and wage growth. So far, we haven't gotten it. And without job or income growth, the economy is vulnerable in the second half, and could provide a dark outcome to the market.

And your actual forecast is?

Lee: On the big picture stuff we have an economy that is saddled with a lot of post-bubble excesses we've been talking about, all against the backdrop of a market that's not particularly cheap against its own history.

Steve: Although we don't want to sound lopsided to the negative -

Just less bullish than last year.

Steve: Well, last year, we carried a well above-average net long position for the hedge fund. It probably averaged about, including high-yield debt, 80 percent.

Lee: That was about 65 percent equities and 20 percent high yield.

Steve: We entered this year thinking it'll be more of a trend year, whether it's a 7 percent-8 percent-9 percent return. But there is a positive side to the market's balance sheet. We are in an economic expansion. It is increasingly broad-based to include capital spending and inventory as opposed to being consumer-centric. There is an expansion outside of the U.S. now. Japan is recovering. Europe is recovering, albeit slowly. Profits are growing nicely, double-digits. Dividends, which all of us have historically attached some significance to, are finally growing. Inflation is benign at the consumer level. Interest rates will be essentially unchanged, you would think for most of the year because the Fed will likely stay on hold. Liquidity at the consumer end is very high. Money market fund assets are up close to 18 percent of equity market capitalization, well above average. So notwithstanding the imbalances that we've talked about, we've thought that the market would provide a positive rate of return. What we're focusing on are the potentials to derail that.

Have you also been adding to your hedges?