Although they say the U.S. is positioned to outperform other developed economies in 2016, Wilmington Trust analysts are preparing for a recession they fear may arrive even earlier than they estimated.
Instead of in the next year or two, the domestic economy could fall into a recession sometime this year, CIO Anthony (Tony) Roth told attendees of the company's annual press briefing in New York City last week.
“Most of the developed world outside the U.S. has essentially had zero net growth since the credit crisis and are desperately fighting deflation,” said Roth. “Our economy and financial system are far stronger than the rest of the developed world, as reflected on where we are in the monetary cycle, the relative growth rates of our economies, strength of our currency, unemployment rate, immigration/assimilation efficacy, etc.”
During the event, entitled “Separating the Wheat from the Chaff: Seeking Quality Investments within an Erratic Market,” the speakers noted several catalysts for recession: the global economy is dealing with a series of issues, including falling oil prices, the collapse in demand for commodities and that impact on emerging-market economies, the end of the Fed’s quantitative easing, a low labor force, a flat consumer market, the sudden slowdown in China's equity markets and the possibility of some countries, most notably Great Britain, leaving the European Union.
“[Great Britain’s exit] would be highly destabilizing for the EU,” Roth said.
In addition to oil, other economic risks include the heightened threat of recession, the under-employment underlying the low U.S. unemployment rate of 5 percent, capital flight from China caused by fear of the country’s uncontrolled currency devaluation and economic woes in Europe.
But, Roth said, if “our recession arrives through organic economic trends and not through an exogenous shock like a China currency crisis or a fracturing of the EU,” it could be quite shallow and we might emerge even stronger on a relative basis.
Wilmington sees emerging markets, mostly in Southeast Asia, as ripe for investment. Clem Miller, the portfolio manager for the firm’s international strategies, said the “sell-off in emerging market high yield has produced growth.” Miller intends to manage this sector with a watchful eye on risk factors such as exchange rate volatility and corruption. “We don't run away from risk,” he said, “but manage it. Not marry it, but be active managers of it.”
The prospect of increasing interest rates did not inhibit the speakers' enthusiasm for real estate investing, especially through REITs, from which they expect to yield strong income returns over the next 10 years, said Cam Albright, Wilmington’s head of investment strategy. Contrary to the broad consumer economy, he said, “leisure is doing extremely well right now.”
Wilmington's 10-year outlook is for lower returns and productivity, with slowly improving indicators, as both developed and emerging economies shift from “old economy” to a “new economy.”
“The tide has been turning,” said Miller. The new economy will be dominated by mobile online complexes, semiconductor makers and online portal providers—companies less dependent on infrastructure or sensitive to commodity prices than oil and gas power plants, for example.
The managers said they will be focused on dividend income growth in the U.S. Technology companies are starting to share profits with shareholders and financial services firms, having met regulatory capital requirements, also are able to resume dividends, said Roth. Recently, the firm's preferred investment themes have included health care, information technology and financial sectors.
Asked if the group thought the presidential race is having an effect on markets, Roth acknowledged it was difficult to predict a winner so far. “It doesn't seem—other than Hillary Clinton—that any other of the candidates on stage are qualified,” he said.
The markets dislike change, he noted, adding that this is one reason he expects Clinton to moderate her policies if she becomes president.
“She will probably move to the center and govern like her husband,” said Roth.
