James Swanson, chief investment strategist for MFS Investment Management, recently gave his midyear outlook for the markets, noting most prominently MFS’s views that “a recession is not in the offing,” and that “stocks are a better relative value than bonds.”
During a call with reporters on Tuesday to discuss MFS’ midyear outlook, Swanson said that interest rates “continue to be low, both in the U.S. and globally, which is helping to stimulate economic activity.”
The housing market continues to rebound in the U.S., as well, he said, noting that “it is now cheaper to own versus rent on average, and demographics and family formation support the need for building more houses.” If housing returns to its pre-2007 levels, he said, “it could deliver up to 2.5% of GDP, driving demand for labor, for construction, as well as for the goods and services that go into finishing a house (paints, fabrics, appliances, etc.).”
Another factor that’s stimulating economic activity, he said, is the “pent-up demand for big-ticket items like cars. The average car on the road today is roughly 11 years old, for example. Consumers are also benefiting from lower commodity prices, leaving them more cash in their pocket after filling up their gas tanks than earlier in the year.”
As to investment picks, Swanson said that stocks are a better “relative value” than bonds, warning boomers against tying up too much of their money in U.S. government bonds.
Given that most boomers have “quite a few more years to live, likely another 30,” Swanson said, and with the “world expecting higher inflation ahead of us, I would say you’re locking in a negative rate of return.”
Putting too much money in “long-term government bonds may not serve [boomers] that well,” as “rates going up would be harmful. As an investment process it doesn’t seem there’s great value in the U.S. government bond market.”
But Swanson did note his optimism for the tech and emerging-market sectors. “The technology sector has matured considerably since 2000, with little debt, strong free cash flow and sustainable earnings underpinned by multiple product revolutions (mobile devices, cloud computing to name two),” he said. “There is also considerable pent-up demand for both software and hardware—the current installed software and hardware base is the oldest on record.”
As for emerging markets, Swanson said that “some emerging-market economies cut rates in 2012 and are now starting to see the positive impact of the rate cuts, which have stimulated local economies.” Emerging economies, he noted, “continue to drive demand for commodities as well as consumer goods.”
Said Swanson: “We like globally diversified businesses with strong balance sheets generating revenue from developing markets as a way to play the long-term secular opportunity of EM equities.”
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