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  2. MARKETS
August 08, 2011 01:00 AM

Mixed economic signals create fear, opportunity

Barry B. Burr, Drew Carter and Robert Steyer
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    CONCERNING: Paul Griffiths sees a 'serious risk' of a double-dip recession.

    The dramatic selloffs in developed-world stocks Aug. 4 reflected investor fears about falling into recession and European and U.S. debt issues, although new upturns in economic indicators might offset lingering anxiety, calm nerves and stabilize the market.

    And as always in a rocky market, some are finding it a time to buy.

    “There's a serious risk of double-dip (recession) — we're very much on a knife's edge,” said Paul Griffiths, global head of fixed income at Aberdeen Asset Managers Ltd., London. “Clearly the big issue is what happens in Europe, and how does the European project handle this” attempt to resolve the debt issue.

    In a note to investors, ING Investment Management said initiatives in the U.S. and Europe didn't go far enough in their debt resolution. For example, the “patchwork” bailout package European policymakers have developed so far is “a far cry from a comprehensive approach” and “is not sufficiently divorced from the political process,” according to the note.

    Donald G.M. Coxe, chairman of Coxe Advisors LLC, Chicago, and an investment strategist, in a conference call to clients Aug. 5, said, “We're still dealing with the same issues we've had for some time ... Central bankers are in the position that they have used up a huge percentage of their firepower in getting the world out of the sharp recession that began roughly in the summer of 2008. What have they got left?”

    Robert Collie, chief research strategist for the Americas institutional group of Russell Investments, Seattle, said, “Psychologically, the reactions (of the market) were very heavily shaped by experiences in 2008. It feels like it (the Aug. 4 selloff) was connected to 2008, rather than an independent event.”

    Mr. Collie said the market remains affected by mixed signals ranging from concerns about European sovereign debt problems, most notably in Spain and Italy, to the better-than-expected U.S. employment report on Aug. 5.

    Several other strategists, however, were more optimistic.

    James Paulsen, chief investment strategist at Wells Capital Management Inc., Minneapolis, said, “People have convinced themselves we are headed for a recession. I think we are safe from recession.”

    The unexpectedly stronger U.S. jobs report “should move people away from recession worry,” Mr. Paulsen said.

    Unemployment fell to 9.1% in July from 9.2% in June, when it was expected to remain unchanged, while other job measures also grew unexpectedly higher, as reported Aug. 5 by the U.S. Bureau of Labor Statistics, Mr. Paulsen said.

    “The job numbers attest we are making progress,” Mr. Paulsen said. “This (jobs report) ... is the first step to calming things down.”

    Despite the market drop and economic worries, “I still believe we have a good shot at the S&P 500 going above 1,400 by year end” and the U.S. gross domestic product growing at 3% to 3.5% in the second half of the year, booming from the 0.8% growth in the first half, Mr. Paulsen said.

    Michael Dueker, Russell's chief economist, based in Seattle, said his firm predicts U.S. gross domestic product growth of 2.4% for the third quarter of 2011 and 2.8% for the fourth quarter. “We anticipate low growth, but not a double-dip recession,” he said.

    Paul Zemsky, chief investment officer for multiasset strategies at ING Investment Management, New York, said, “The U.S. fundamentals do not suggest a recession.” The economic environment “is a bit puzzling,” he acknowledged, due to the alternating of bad news, such as the European debt problems, and good news, such as the jobs report.

    Towers Watson & Co.'s five-year economic forecast is “a bumpy road to recovery, and this is one of the bumps,” said Carl Hess, the New York-based head of investments.

    Mr. Hess said the recent market activity “was symptomatic of a bigger issue — the unwinding of the great debt bubble” in Europe and the U.S.

    The good news in the market's mixed signals opens the door to opportunity, some investors believe.

    Mr. Paulsen said, “I think it will end up being a good opportunity here” for buying, although not immediately. “The problem is we've done so much psychological damage to the market it might take awhile to come back again.”

    Aon Hewitt sees equities as being fairly valued, so the recent market drops made for buying opportunities, said Colin Robertson, London-based principal and global head of its asset allocation.

    “The question is, "When do you buy,'” Mr. Robertson said.

    A time to move

    Mr. Griffiths said Aberdeen saw in ever-declining bond yields a time to move to underweight highly rated U.S. and U.K. bonds, because of those countries' mounting debt and budgetary issues.

    Michael O'Brien, managing director and global head of the institutional client group at J.P. Morgan Asset Management, London, said there are no “obvious” buying opportunities after Aug. 4. “It's a market that's not necessarily reflecting the fundamental value of something, given the uncertain macro environment,” Mr. O'Brien said.

    The falling equity markets and yields on highly rated bonds were a nightmare for corporate pension funds in the U.K.

    The 350 largest U.K. corporations saw about £39 billion ($64 billion) of pension value wiped off their books in the four weeks ended Aug. 4, according to the Aon Hewitt 350 index.

    “These dramatic swings will focus the minds of finance directors and trustees even more on the importance of derisking,” Marcus Hurd, a principal at Aon Hewitt in London, said in a company news release.

    However, now isn't a particularly good time to reduce risk, Aon Hewitt's Mr. Robertson said. “It's not a great time to sell equities and buy bonds,” he noted.

    ING's Mr. Zemsky is telling clients to trim some risk but not to make wholesale changes in their investment strategies, and that means staying in equities. U.S. government bonds “are a pretty poor investment right now,” he said.

    For investors “who have been sitting on a lot of cash,” he recommended they “start nibbling” at broadly diversified equity funds or funds that concentrate on industrial or cyclical sectors.

    Despite the market drop, Mr. Zemsky said he hasn't received many inquiries from clients. “People haven't had a chance to catch their breath,” he said. “We haven't had a flood of phone calls.”

    Well Capital's Mr. Paulsen said he is advising clients, “Do you want to take advantage of this? We just cheapened the market by 11%, 12% in the last 30 days. I think it a good time to reduce your cash balances.”

    “I think you want to be overtilted toward risk assets rather than defensive assets, overweighted stocks than bonds,” Mr. Paulsen said.

    Mr. Collie added, “We're not seeing the equity market as fundamentally expensive. Corporate balance sheets are strong. Overall, the equity market has a decent valuation at the moment.”

    Despite a bearish view of the economic outlook and financial sector, Mr. Coxe isn't recommending cutting back on equities.

    “We don't recommend running for the hills and going into instruments yielding zero,” he said. “We have to adjust to a period of low growth,” Mr. Coxe said in the call.

    “I think a return to that (selective equity investing) is a salutary development ... That can't be called an optimistic outlook ... but real investment wisdom will be rewarded.”

    Mr. Hess added a note of caution to equity investors, saying, “While things are cheaper today than they were last week, I'm not sure they are cheap.” ?

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