NEW YORK - "There is so much stimulus in the economy. The punchbowls are at the party, they're spiked-but no one is drinking yet." That was the apt summary of the current economic and investment picture by Rodney Olea, manager of the AHA Limited Maturity Fixed Income Fund, speaking at SunStar's press briefing for Lipper Leaders here last week.
"As the global, coordinated effort to increase liquidity and the global governmental guarantee of financial assets led by the United States takes hold, the next global expansion will inevitably take place," echoed Jim O'Leary, vice president at Navellier & Associates and portfolio manager of the Touchstone International Growth Fund.
The government's various fiscal stimulus packages, totaling over $8 trillion by some estimates; exceptionally strong year-over-year earnings projected for 2009 due to this year's dismal comparables; consistently strong suppliers of non-discretionary consumer goods; and industry leaders with clear competitive advantages were among the many bright spots that speakers highlighted in a presentation that was largely no-nonsense but overwhelmingly optimistic.
The managers' talk of good investment finds in the market was a stark but welcome contrast to a week when the government officially acknowledged a recession has been plaguing the nation for the past year, and news of widespread layoffs continued. On top of that, some economists and investment managers are now predicting the stock deleveraging process could continue for another 18 months.
Thus, now more than ever, speakers stressed, investors are looking for high-quality, low-risk investments that can promise strong cash flow, competitive advantages, liquidity and safety of principal-if not merely small basis point spreads above Treasuries.
"Investors have been running away from anything with perceived risk," said Thalia Meehan, manager for the Putnam Tax-Free High Yield Fund.
Thus, at the Principal MidCap Blend Fund, the motto is, "Boring but Beautiful," said portfolio manager Tom Rozycki. In fact, the more mundane the company, the better, said Rozycki, whose current holdings include O'Reilly Auto Parts, an after-market supplier that serves mechanics and retail customers alike, Iron Mountain file storage facilities and Covanta waste energy company.
The Huntington Mortgage Securities Fund, which successfully sidestepped subprime and alternative-A-rated securities, said Bill Doughty, vice president and senior portfolio manager, is now actively investing in government-backed securities with higher coupons in the 15-year range, as well as REITs that offer good dividends and are successfully refinancing maturing debt.
Amid these pressures, seeking absolute, bottom-up, rather than benchmarked, levels of risk and return is the best way to find profits, said David Spika, portfolio manager of the Timothy Plan Large/Mid-Cap Value Fund. "In addition, rigorous risk management is employed at every step of the process, resulting in strong risk-adjusted returns over a variety of market cycles," he said. "Our risk-averse nature leads us to be willing to forgo upside opportunity in order to protect capital."
For the foreseeable future, there will be bear market rallies and false starts, so investors will be wise to take on some beta in order to capture them, Spika said.
Any More Catastrophes?
However, while the outlook for select pockets of the market, and 2009 overall, is currently good, warned Thomson Reuters Director of Research Ashwani Kaul, should there be any further catastrophic news, analysts will have to recalibrate their current earnings figures-as they have drastically done far too often throughout this year. For now, however, 2009 growth in the Standard & Poor's 500 Index is projected at 9.9%. For the third quarter of 2008, earnings are currently projected to decline 18.7% but rise by 13.3% in the fourth quarter of 2008.
While analysts' projections have either been spot-on or only slightly below actual earnings consistently for the past five years, Kaul said, this year, analysts have been caught way off balance. In their defense, the research director said, no one could have predicted the historic catastrophes that have beset the investment management, mortgage, credit and banking industries throughout this year. As a result, on April 1, Thomson Reuters' projected fourth-quarter earnings growth for the S&P 500 was a rosy 64.1%. That edged down to 59.3% by July 1, slid to 46.7% by Oct. 1, and now stands at an incredibly lower 13.3% today.
And even that figure could change, Kaul said.
So, taking today's economic factors with a grain of salt and the realization that conditions could change in a New York minute, Thomson Reuters predicts that financials could surge by an incredible 203% in 2009. The next-best category would then be consumer discretionary stocks, rising 23% next year, followed by healthcare and utilities, both estimated to rise 8%.
Thomson Reuters predicts that the weakest performers next year will be energy (-19%), materials (-17%), industrials (-1%), technology (2%), telecommunications (3%) and consumer staples (4%).
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