Investment Perspective
2009 - First Half
After the early year selloff which culminated on March 9th, markets staged a powerful rally anticipating that the world will survive the financial crisis. Thanks to successful government intervention, a much feared, systemic "run-on the bank" was averted.
The Federal Reserve Board and the Treasury Department had aggressively used a combination of programs to restore confidence and permit the financial system to continue to function. As a consequence, the worst case scenario of a world wide economic depression was avoided.
Current economic environment
The latest indicators suggest the economy is no longer in a free fall and is actually beginning to stabilize. While we do expect the economy to resume growth, we believe it will be at a slower pace than in past recoveries.
Over the last three decades all economic recoveries were supercharged by three major tailwinds:
- De-regulation
- Leverage (increasing debt)
- Globalization
Today, all three tailwinds have turned into headwinds. The current trends of:
- Re-regulation
- De-leveraging (paying down debt)
- Protectionist measures
The trend of re-regulation, paying down debt and protectionist measures are a complete reversal of the past environment shaped by laissez faire policies which began with the Reagan/Thatcher yearsand the new era of globalization started with the fall of the Berlin Wall.
In addition to the three powerful headwinds, demographics have also turned against a scenario of high economic growth in most of the developed world. Faced with lower asset values in both their homes and investment portfolios, baby boomers may be forced to save more as opposed to spend ahead of retirement.
In the short run, consumer spending had been bolstered by various fiscal stimuli. Stimulus is temporary and we believe sustainable consumer spending may fall short of fueling a speedy economic recovery.
How are we currently positioning portfolios?
To properly position portfolios, we need to first recognize the economic, political and demographic conditions of our time. As conditions have changed, we need to resist the temptation to simply hope things will quickly return to yesterday’s normal.
Fixed Income Portfolios
We Emphasize:
Select Corporate High Quality Bonds – Corporate bond spreads have declined somewhat but their risk/ return tradeoff remains attractive. At some point in the future inflation fears may start affecting the bond market. We are currently evaluating the possibility of shortening the maturity of high quality bonds to protect against inflation risk. A dedicated exposure to TIPs (inflation protected Treasury securities) is also under consideration.
We Avoid:
Treasury Bonds – as anticipated, Treasury Bond prices have declined since the beginning of the year. We believe the price will eventually decline as a large new supply of bonds is being issued.
Equity Portfolios
We Emphasize:
Alternative Equity & Emerging Markets – as the developed world may experience a period of slow economic growth and future government policy actions remain uncertain we will maintain exposure in
- Select Emerging Markets that are becoming increasingly influential in the world’s economy
- Income oriented investments located higher up on capital structure (including corporate bonds as an equity substitute)
- Market neutral and arbitrage strategies as equity alternatives
- Commodity strategies – to benefit from potential emerging markets growth and help protect against inflation risk
Other Specific Themes within domestic and foreign equity allocations
Consumer spending is likely to remain subdued. Governments will try to fill some of the void and stimulate the economy through infrastructure spending. We will emphasize companies or managers investing in companies likely to benefit from the infrastructure build out.
Additional areas of special focus remain in the Healthcare sector. While some health insurers may be negatively impacted by future government action, biotech, life sciences, generic drug and even select major pharmaceutical companies may stand to benefit in the years ahead. Many healthcare stocks are currently attractively priced relative to cash flows generated and future potential growth.
Given the macroeconomic threats to US dollar, we seek to maintain all foreign investments denominated in their respective local currency for now.
On a selective basis, we continue to employ various structured investment strategies. The structured strategies are designed to allow for accelerated recovery of values (subject to a pre-determined ceiling), while offering a (pre-determined) buffer of protection in case markets decline.
Your financial advisor stands ready to discuss the applicability of these strategies to your portfolio.