By Editors of Wealth Management Exchange
Investors who were badly hurt in 2008 recovered somewhat in 2009. The market’s comeback, was, to be sure, more swift than the overall economy. What can investors expect in 2010? There is reason for cautious optimism but also lingering unease about the prospects for steady economic and investment recovery.
Many investment analysts reluctantly admit that the great achievement to note as 2010 unfolds is the restoration of a financial system that just months ago hovered on the verge of a total collapse.
“First and foremost, there is absolute reality in the fundamental strength of the economic and financial systems that we’re part of,” comments Tim Leach, Chief Investment Officer, U.S. Bank’s Private Client Reserve.
UBS Wealth Management Research – Americas (WMR) issued a report aptly entitled “2010 Outlook: The Year of Living Less Dangerously.”Overall, UBS analysts are cautiously optimistic on the investment climate for 2010. But they do warn of some challenges ahead: the economic recovery process remains fragile; geopolitical threats abound; trade conflicts could bubble up at any time; and unprecedented budget deficits threaten the long-term stability of the U.S. economy.
And though the world breathed easier as markets began to recover from the crises of 2008, along came the crisis in Dubai to suggest that 2010 could still produce an earth-shattering event that could put us back where we left off in 2008. “There are, of course, all sorts of risks elsewhere across the world, as evidenced by the most recent turmoil involving Dubai,” according to Jim O’Neill, Chief Economist, London, for Goldman Sachs.
Another expert concerned that debt problems could derail the recovery is Jack Ablin, CFA, Chief Investment Officer at Harris Private Bank.
“Unfortunately, credit contraction is so severe that a second wave of financial stress is lapping up on the shore,” notes Ablin. He adds that Dubai World, the investment arm of the Gulf city/state, having raised $80 billion over the last four years, is having difficulty making their debt payments.
“At the same time, Greece and Spain are under fiscal duress. Greece’s sovereign debt was downgraded to BBB as credit rating agencies worried that its economy will come under strain from the pullback in tourism and a plunge in exports. Greece’s stock market has plunged about 25 percent over the last five weeks. Spain is suffering similarly.”Ablin is not optimistic: balance sheets worldwide are under stress.
Still O'Neill and his team at Goldman Sachs are very much positive about 2010. The global economy will expand 4.4 percent in 2010 and 4.5 percent the following year as the world recovers from the credit crisis, they forecast.
“Our projections suggest that both 2010 and 2011 will be rather strong years,” according to Jim O'Neill. “The combination of better-than-expected growth and lower-than- expected inflation should be good news for financial markets.”
Another firm that is taking a bullish but more cautious approach to 2010 is J.P. Morgan. “The huge financial storm of 2008 and the painful recession that followed still dominate the investment landscape as we enter 2010. The economy and financial markets have both embarked on recovery, and the most probable scenario is that these recoveries will strengthen and mature,” comments the firm’s Dr. David Kelly, CFA, Managing Director, Chief Market Strategist, J.P. Morgan Funds.
Dr. Kelly believes that there are major factors that signal market growth for 2010:
1. The economic rebound is more secure than many realize.
2. Inflation risks are lower than many recognize, allowing the Fed to maintain super-low short-term interest rates for a long time.
3. Mispricing across asset classes today could set up a big divergence in investment outcomes in 2010 as investor psychology moves back to normal, and money moves off the sidelines.
“This decade of bubble and disappointment, capped off by a year of financial trauma, has fostered an unreasonable hatred of stocks, love of Treasuries and hoarding of cash. All of these amount to a misallocation of investor assets, “Kelly points out.
Predictions and Investment Recommendations
Perhaps one of the most influential analysts is Bob Doll, Vice Chairman and Chief Investment officer at BlackRock. Here are his predictions for the economy and markets:
- The US economy grows above 3% in 2010 and outpaces the G-7.
- Job growth in the United States turns positive early in 2010, but the unemployment rate remains stubbornly high.
- Earnings rise significantly despite mediocre economic growth.
- Inflation remains a non-issue in the developed world.
- Interest rates rise at all points on the Treasury curve, including fed funds.
- US stocks outperform cash and Treasuries, and most developed markets.
- Emerging markets outperform as emerging economies grow significantly faster than developed regions.
- Healthcare, information technology and telecommunications outperform financials, utilities and materials.
- Strong free cash flow and slow growth lead to an increase in M&A activity.
- Republicans make noticeable gains in the House and Senate, but Democrats remain firmly in control of Congress.
Says Doll: “In our view, a gradually improving global economy, coupled with the likelihood of some interest rate increases, should create an environment where equities and selected credit-sensitive fixed income securities outperform Treasuries and cash.”
J.P. Morgan’s Kelly has similar views. He notes: “some of the best investment opportunities may lie in considering not what could possibly go wrong, but rather what will probably go right.”His recommendations:
·Overweight stocks relative to fixed income (in the U.S.) to take advantage of a stronger-than- perceived economic rebound.
·Underweight U.S. Treasuries to avoid the ramifications of stronger economic growth and soaring government debt.
·Overweight international stocks relative to domestic stocks to benefit from relatively strong overseas growth and a continued dollar slide.
·Deploy cash back toward long-term investments ahead of the crowd.
Will Emerging Markets Continue To Sparkle?
Many analysts are placing bets that growth will be stronger in some regions outside of the U.S., most notably in emerging markets.
Like J.P. Morgan’s Kelly, Christopher Sheldon, Director of Investor Strategy at The Bank of New York Mellon likes equities, especially the prospects for investing in emerging markets.
“Our portfolio recommendations continue to echo our constructive view on equities overall. We believe that equity markets are reasonably valued. Based on our growth and U.S. dollar expectations, we have recommended an increased allocation to emerging market equities. Most portfolios also should continue to have an increased emphasis on other non-U.S. investments.”
Another proponent of international is Giles Keating, Head of Global Research for Credit Suisse Private Banking and Asset Management. His recommendation: “As a core holding we think that investors should focus on quality large cap equities in America and in Europe, which have big exposure to emerging markets. Moving on from that, taking just a little bit more risk, we still think that direct investments into emerging markets will do well.
Morgan Stanley Global Analysts Joachim Fels, Manoj Pradhan & Spyros Andreopoulos in London see the strong economic indicators for emerging markets that should give investors cause for being optimistic about investment opportunities
“Our 4% global GDP growth forecast masks two very different stories. One is a still fairly tepid recovery for the advanced economies - the ‘triple B' recovery. The other is a much more positive outlook for emerging markets, where we forecast output to grow by 6.5% in 2010 (China 10%, India 8%, Russia 5.3%, Brazil 4.8%), up from 1.6% 2009.” They add, “A rebalancing towards domestic demand-led growth in EM is well underway. Moreover, as our China economist Qing Wang has been pointing out for a while now, the official statistics are likely to vastly underestimate the level and growth rate of consumer spending in China. In short, we think that the theme of EM growth outperformance has staying power….”
A Final Thought On Investment Strategy
While the experts debate the fine points and projections of 2010, check in with many financial advisors and they will tell you that investment strategy is likely to take some new turns in the months ahead
“The mix of assets that should make up a portfolio has changed a lot,” says Robert Haworth, Regional Investment Manager, The Private Client Reserve, U.S. Bank. “We have had to move away from what worked in the past.” Particularly what passed for conventional wisdom in terms of diversified asset allocation is now open to question.
Investment pundits and financial advisors have learned several major lessons from recent market upheavals, and most of what they learned revolved around the uncertain behavior of investors.
“While signs of the economic and market recovery have helped us sleep better, many worries conspire to keep us restless. To paraphrase a good quote, risk is the future, which is unknowable. While this can be scary, far more so is the fact that market movement is influenced by the decisions of investors who believe that they know exactly what is going on,” observes Christopher Sheldon of The Bank of New York Mellon.
