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What deflation threat?

Deflation isn't a threat in North America, according to Josh Byrne, managing director and senior portfolio manager at Boston-based Putnam Investments. "We don't think that even though Japan has had a deflationary environment since the early 1990s, that that is the model for what is going to happen in North America and the rest of the world," he said in a recent interview. Mr. Byrne, who is a member of Putnam's international core equity team that manages a number of funds, including the Putnam International Growth Fund and the BMO International Equity Fund, said the situations are very different.

The bubble in Japan was in real estate, which isn't a liquid, tradeable asset, he explained, whereas the bubble in North America was in the technology and telecom sectors and related stocks, and the latter are liquid assets. North America has been in the midst of repricing those financial assets for the past two years as the stock market has corrected, he said. With the slump in stock prices, some companies have gone out of business, their assets have been sold and their workers and capital redeployed to companies and industries that have better prospects, he said. "In Japan, that redeployment of both human and financial capital hasn't been allowed to take place," said Mr. Byrne, who feels that it is important that real structural change take place in Japan, starting with Japanese banks' loan portfolios.

As of Sept. 30, Japan was significantly underweighted in the Putnam International Growth Fund, along with Britain. The fund was most overweighted in South Korea, followed by France and Switzerland. The fund's top 10 holdings at that time included TotalFinaElf SA, Toyota Motor Corp., Samsung Electronics Co. Ltd., GlaxoSmithKline PLC and Vodafone Group PLC.

The equity team, of which Mr. Byrne is a part, looks for stocks and sectors that typically have very good cash flow and have pricing power, leading market positions and very strong business models. Those characteristics are present in some food manufacturers and consumer electronics areas, he said. He is also drawn to telecoms.

© 2007 The Globe and Mail. All rights reserved.

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