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June 02, 2010 at 08:00 PM
Despite concerns about European debt and overheated Chinese growth, the U.S. economy is well into recovery–and that means American retirees need to take a closer look at their spending and saving patterns, MFS Investment Management chief investment strategist James Swanson said in a midyear investment outlook on Tuesday, June 2.
Even with a default of the debt of Portugal, Spain, and Greece, Swanson said, the world’s economy is nowhere near the crisis levels it reached during the Lehman-AIG episode of 2008.
“As a worst-case stress test, if you deplete about 28% to 30% of the base capital of European banks, my thesis would be that there’s still a lot of capital left over, and that’s without the European Central Bank using its [facilities similar to the U.S. Trouble Asset Relief Program] for those banks,” Swanson said. “This time around it’s very different. The world profit cycle is in a rejuvenation phase. There’s a V-shaped economic recovery going on which wasn’t going on when the Lehman-AIG crisis occurred.”
Meanwhile, in China, there may have been concerns that the country’s problems were spilling over into the rest of the world, but those market fears have been overstated, according to Swanson.
“China was growing at a 12% annualized real rate, and their goal is to run that country at 8%. They’re a command economy, so they can do that. I don’t think we should worry about a cooling of China’s property or share markets. Too much money has been going in at too fast a rate, but the government is slowing it down,” he said.
Of greater importance now for American investors is the massive infusion of free cash flow as a percent of sales at U.S. companies, Swanson noted, with market cap close to 50-year records.
“The implication of that is there’s a lot of cash on balance sheets,” he said. “These companies could buy back shares, raise dividend payout, hire new workers, spend on capex, or go on merger and acquisition booms. Any of those five options is either market market-friendly or economically friendly.”
Overall, Swanson added, corporate America is currently experiencing pent-up demand–and that will be good news for the workforce.
“The trend line is unit labor costs falling and productivity rising, and the implication is that profits as a share of GDP continue to rise. And they have been rising. This in my opinion is a recipe for this economic expansion to be sustainable because it’s these companies that do the hiring with a worker base that has to be increased now,” he said.
