NEW YORK (
) -- Stephanie, we have new leadership in China and economic data there continues to be more positive. What does this mean for fiscal policy going forward?
Well I think if you have your choice, you probably want to skew some of your portfolio towards China, the emerging markets, where there are less question marks. Although we're not out of the woods by any means, I do think that the RRR (reserve requirement ratio) cuts that we saw in China, the interest rate cuts that we saw earlier in the year, and particularly the liquidity measures are very powerful and very understated and underappreciated and are really going to lead to a soft landing in China. I do think that given the current valuations, several stocks that are exposed to China are more priced like a hard landing. So I think that's where your opportunity is.
Yeah, I know that you look at the FXI and have a couple multinationals like you mentioned. What are some of your favorites here to take advantage of the China recovery?
I mean we've been buying FXI certainly. Emerson, we bought last week. That quarter was actually very good; unfortunately got masked with the down draft in the market. Eaton also had a great quarter and I think that the company is really under this huge transformation with this deal with Cooper and I think 2013 sets up very well for them. We still like Caterpillar as well, particularly on the JPMorgan downgrade.
Yeah, exactly. They downgraded it to a neutral from a buy-rating on the concern of a decline in capex spending in the mining sector. Do you agree with the downgrade?
No. Not at all. I think that in the low $80s your risk/reward is very attractive. The stock is down 27 percent from its high. The stock trades at about ten times forward estimates -- historically it's traded about 15 times, and I think that this is known. We know mining capex budgets are coming down. They're down about 14 percent this year. You're going to be down about ten percent next year and maybe then in 2014 you're down five percent, so less bad if you will, but a lot of bad news is already priced in and I think if you believe in the China recovery certainly the excavators sales and a lot of the data in the inventory in China still remains problematic but I think it's already known out there and the lowered estimates as a result have already come down. So I think that it's a very interesting risk reward.
There are also other positive catalysts for this stock here in the U.S. and other parts of the company.
Oh certainly. I mean you have the U.S. construction market, right? That's about...the U.S. is about 30 percent of total sales and the U.S. construction market is about 10 percent. Global construction is about 34 percent. They've got a 25 percent market share just in the U.S. alone, so if you believe in the U.S. recovery in construction, which we do, as another way of playing it plus you get a very good dividend. You have a very solid balance sheet. You have good management, they get it. It's a tough time. It's a cyclical business but I think you're at the trough and I think that's why in low $80s it's interesting.