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Swanson of MFS Sees ‘Garden-Variety Recession’ in Europe

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Thanks to a number of factors, including world profit margins on the rise and an expansion, although not a recovery, in the U.S., the next six months present “not a terribly bearish story,” James Swanson of MFS Investment Management said on a conference call Monday.

Europe’s problems, said Swanson, a chief investment strategist, have their root cause in the lack of a competitive cost structure based on labor. He added that it would likely take an actual default for European political leaders to do more than “Band-Aid the problem” by enacting temporary fixes.

Still, rather than predicting collapse, he said the situation was “workable in the short term” if the eurozone held on, and that he anticipated a “garden-variety recession—two quarters, at most three”—not on the scale of the Lehman Brothers meltdown. Following that, Swanson said, Europe would see a mild recovery; it “can’t have a robust recovery because unit labor costs are too high.”

China may be slowing, he added, but not crashing. Tight monetary policies on the part of the government coupled with eurozone issues caused the slowdown, but the change in monetary policy, intended to lower interest rates and restore liquidity to the banking system, will bear fruit in “a few months.” In addition, more dramatic rate cuts in Brazil and India will also generate change.

In the U.S., Swanson said, the consumer is driving the economy; he pointed out that profit margins rose and corporate profits hit an all-time high for publicly traded companies, and said that bodes well for the future. He also credited a repricing of labor, saying that has allowed the U.S. to be competitive in exports and citing that as a reason that the U.S. is in a nonrecessionary period.

On deck is a search for income outside the bond market, with investors being induced to seek out dividend yield as a means of boosting return. Also in store is a pent-up demand for technology, which could indicate that technology companies will be go-to investments when the S&P 500 upgrades its installed software base—which, he added, is the oldest it has ever been. “They’ll have to refresh,” he said.

And while the U.S. stock market is the most expensive, Swanson said that it was still cheap compared to historic norms.


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