“Someone is making money in every market cycle,” Bob Froehlich, executive vice president and chief investment strategist for The Hartford, said at the 2012 ASPPA 401(k) Summit on Monday.
In 2012, Froehlich (left) described two major positive shocks to the global economy he expects to occur, although because U.S. investors tend to focus on the negative, they’ll probably miss them.
First, Europe is not heading to a recession, he said, adding that it was important to separate geopolitical issues and economic issues. Geopolitical changes will occur on a much longer time scale, if they ever do.
“They’re not going away,” Froehlich said emphatically.
“Recovery begins and ends with Germany,” he said. Germany is the No. 2 exporter in the world, he said, after China. It may not export a lot of goods, he said, but what it does export is expensive. The country’s export market is $2 trillion, and if the euro falls, German exports will explode. He suggested that the European Central Bank should follow the Federal Reserve’s lead and lower interest rates to 0%.
The second major shock to the global economy, Froehlich said, will be that over the next six months, China will “declare victory over food inflation.” China will find a way to reduce food costs, he said; it will not fall victim to the kinds of unrest and uprising seen in the Middle East in the last year.
Froehlich was confident that China would not suffer a hard landing, as many analysts have predicted. He sees the country enjoying growth of between 7% and 7.5%.
Growth in the United States will “muddle along,” he said. In the United States, trend growth is 3%, but Froehlich doesn’t expect growth to get any higher than 2% this year. Weakness in the residential real estate market will continue through 2014, he said, dismissing some analysts’ suggestions that the housing market has been improving lately. “After a bubble bursts, it takes a decade to recover,” he said.
Another drag on U.S. growth is unemployment. Drops in the jobless rate hide the loss of workers who have given up and left the labor market entirely. Older workers refusing to retire, small businesses that are unable to hire, and big businesses that are not rehiring the people they laid off when the recession started are all hindering real improvements in the unemployment rate, he said.
Unfortunately, those factors are unlikely to change soon or quickly, Froehlich said. Thus, a recovery won’t feel like a recovery because the economic changes that Americans dearly want will not happen.
Froehlich named two investment “themes” he expects to see in 2012. The first is that managers need to overweight to large-caps. Investors are nervous, and when they are nervous they want the reassurance they get from a big company and a name they recognize, he said.
Second, dividend-paying companies will outperform companies that do not pay dividends. Yes, it’s a crowded trade, he said, and if you make the same trade as everyone else, eventually it becomes the wrong one. But companies can consistently increase their dividend and still keep corporate America accountable because dividends can only be paid in cash. “Companies can only lie to you 89 days. They have to tell the truth on the 90th day,” he said.
Combining these two trends, large-cap, dividend-paying energy companies will be another big play, he said.
Another stroke on dividends’ side is that they can only go up. Currently, the dividend payout ratio is below 28%, the lowest level in 75 years, according to Froehlich.
Froehlich is enthusiastic about the media sector in 2012. Sure, broadcasting companies are frequently mismanaged, but they “make so much money [they] can’t mismanage it fast enough,” he said. Two major events that will give broadcasting companies a boost this year are the election and the Olympics this summer in London. Because both political parties appear to think they’re going to win the election, they’ll keep spending on media until the last minute. London’s proximity to the United States means that when the Olympics are broadcast this summer, East Coast viewers will be able to see 90% of events live.