Royce funds – The U.S. An Oasis In A Global Sea Of Problems

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Royce funds – The U.S. An Oasis In A Global Sea Of Problems

Despite the ongoing political and economic uncertainty in the emerging markets and a slow start for stocks in 2014, Portfolio Manager and Principal Charlie Dreifus believes the U.S. economy is in good shape going forward.

In January, generally weak economic news and data coming out of China gave momentum to the declines in emerging markets. Obviously, given the strong gains last year in the U.S. stock market, this news also served as a handy excuse to take profits. Right now, the recalibration regarding emerging markets has resulted in Mr. Market demanding higher returns given the high risks.

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However, politics may get in the way of emerging market central banks continuing their tightening, and thus slower growth, as elections loom in India, Indonesia, Brazil, and Turkey. Stagflation is common these days in the emerging markets and could take quite some time to eliminate.

Contrary to almost all investors’ expectations, including ours, the market declined significantly in January while bond yields fell sharply. The primary causes were emerging market turmoil and the U.S. economy losing some steam. Some companies reported earnings that were disappointing to many investors, though generally not to us.

For the economy, our belief is it may merely be the cold, snowy weather to which much of the U.S. has been subjected, though it will take time to tell for sure. The U.S., despite the current turbulence, is in the best shape vis-à-vis the alternatives. Our trade and budget deficits are shrinking, and our GDP growth is solid. The measured pace of tapering by the U.S. Federal Reserve should be completed by the end of 2014, leaving forward guidance as the main policy tool of the Fed.

The incremental margin thesis continues to intrigue us, particularly when most are saying that margins are too high and mu