Strategist says time to invest: Equities, emerging markets, commodities all merit fresh look

Jun 22, 2009 (Albuquerque Journal - McClatchy-Tribune Information Services via COMTEX) -- UTC | Quote | Chart | News | PowerRating -- Bank of America's private wealth management experts say it's time to get back in the game.

The director of the bank's U.S. Trust macro strategy and research, Tim McGee, who met with clients in Albuquerque and Santa Fe earlier this month, said in a Journal interview that he is advising investors to over-weight their portfolios in favor of equities, investments in emerging markets, commodities and in countries that produce commodities. U.S. Trust thinks investors should consider the technology sector and believes the financial sector has gone through the worst of the downturn.

McGee said U.S. Trust, which became part of Bank of America two years ago, evaluates where the economy is in a given business cycle, then develops its investment strategy.

"Our cyclical indicators told us in the winter that the deepest declines (in economic activity) were passing and we were seeing moderation in the declines," McGee said. "In March we saw from the cyclical indicators that the leading indicators were making a trend change. Usually when that happens, within three to six months you get out of a recession."

McGee said equity markets were undervalued in March at a lower level than at any time since World War II.

"The timing of a cycle is a bit tricky, obviously, but we felt it was a good time to get a little less risk averse and more aggressive about taking advantage of what was likely to be an upswing in stocks," he said. "Since then the indicators have continued to show the same kind of pattern that you see in a broad sense as you move out of a recession."

Among the indicators U.S. Trust noticed:

The spread between yields on private sector debt and government debt started to narrow.

"Everybody got into government debt because they were afraid of private debt, and that caused spreads to balloon out to levels that we haven't seen in some cases since the 1930s," McGee said. Historically, when spreads are wide it's a "good entry point for buying corporate debt."

Orders for factory goods have stopped falling and inventories are declining.

"We've seen inventories decline a lot more than demand has," McGee said. "Even without much growth in demand, we've had an overshoot in inventory liquidation, which more or less implies manufacturing has got to pick up in the next few months."

The Institute for Supply Management index has gone over 50, up from a low of 23. McGee said that as credit has become more available, businesses are starting to order the materials they need to start building products.

The profit outlook is improving.

McGee expects business profits to grow 20 percent to 30 percent next year. "They are coming off of a major drop," he said. "That doesn't mean they will be going back to where they were at their peak, but you can grow off the basement 20 or 30 percent quite easily when you make this kind of turn."

Poorer countries and emerging economies will continue to drive global growth, McGee said. Those markets will need energy and infrastructure to satisfy their emerging middle classes, which will strain the world's ability to produce enough energy, water and food. That growth will also create new environmental issues. Therefore, McGee said, prices for commodities can be expected to rise.

"The worry there is even though there is plenty of labor and capital, strains on natural resources are going to put bottlenecks in the next expansion, just like it did during the last one," McGee said.

Those bottlenecks, coupled with central banks worldwide printing money at a high rate, would normally signal inflation, but McGee doesn't think that's going to be a problem in the near term.

"We've created more excess capacity in the global economy than we ever had in the post-war period," he said. "We can produce 100 million cars in the world. We're only selling two thirds of that." U.S. Trust is advising its customers to look for opportunities to invest when companies consolidate their excess capacity.

McGee isn't worried about the big increase in the world's money supply either. "One of the biggest misconceptions out there is this monetary policy implies we're going to have an inflationary outbreak any time soon," he said. "We need to have the economy absorb a lot of excess capacity, we need to absorb a lot of unemployed people before we get pricing power in business to cause inflation to re-emerge. If we get that kind of growth, it's going to take several years of growth to get the economy back to its potential."

"The biggest risks are political risks," McGee said. "The biggest threat to the U.S. economy is getting our fiscal house in order. The fiscal policy that is helping us avoid a depression is a necessary thing. It's a relatively short-term thing. But there is a big structural problem related to Social Security and the Medicare system."

Those entitlement programs will be a continuing drag on the economy until the political will emerges to fix them, McGee said.

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