There are still reasons for hope about the long-term strength of the economy.
Investment managers gave that assessment here at an investment outlook conference sponsored by MFS Investment Management, Boston, a unit of Sun Life Financial Inc., Toronto.
Michael Roberge, chief investment officer for U.S. investments at MFS, observed that few investors are in an optimistic mood.
Today, most investors are “crouching in a fetal position,” Roberge said. “At the end of the day, it is not [about] what the economy will do, but what is priced into the market.”
But Roberge noted that the typical recession lasts about 11 months.
If the current recession began in April, that means the bottom should come in March 2009, Roberge said.
When the bounce back comes, there could be “massive returns off the bottom,” Roberge said. “People will look back and wish that they had bought.”
Rather than fleeing to cash, investors should “slowly migrate” to high-quality stocks, Roberge said.
Eric Weisman, a member of MFS’s fixed income team, acknowledged that the current outlook appears to be bleak.
The “markets are pricing for a bad [recession],” Weisman said.
Consumers will have to buy 1 million of the 2.2 million housing units now on the U.S. market to restore equilibrium in the housing market, Weisman said.
But the current recession appears to be part of a normal, cyclical response to unsustainable market trends, Weisman said.
“Hopefully, the recession will not be long,” Weisman said.
Thomas Melendez, an MFS institutional portfolio manager for MFS’ international and global equity portfolios, said the markets will have to be brought back into equilibrium during a period of unprecedented volatility.
World stock markets have experienced more days of dramatic price moves since September than they did during the entire 40-month period between October 2003 and January 2007, Melendez said.
Fear of that kind of volatility “makes investors do the wrong things at the wrong time,” Melendez warned.
But China and India alone are graduating 1 million scientists per year, creating huge new groups of consumers, middle class consumers, and consumers who are setting down roots, Melendez said.
The emerging markets will be spending $20 billion on infrastructure over the next 10 years, Melendez predicted.
Also during the conference:
- Roberge said an auto industry bankruptcy without government intervention would be disastrous.
The government should help the auto makers, but it also should insist on a restructuring, not simply give away money, Roberge said.
- Roberge predicted that capital gains tax rates and dividend tax rates will increase, and that the government will impose more restrictions on use of leverage, hedge funds and credit default swaps.