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Roundtable: Investing in a No-Growth Market

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With prominent investors like PIMCO’s Bill Gross and Mohamed El-Erian calling for a “new normal” of low to no growth in the U.S. economy, I asked some of our analysts for investing strategies in such an environment.

Morgan Housel: First we have to note why there will be a no-growth economy. GDP growth is being propped up predominantly by unsustainable measures like stimulus and inventory restocking. To get sustainable growth, you need to see real demand from consumers. Not only is that not happening in a meaningful way, but probably won't for some time because debt deleveraging is still atrociously bad. As I showed in this article, a return to historically average debt-to-disposable-income levels could suck $4.6 trillion out of consumer spending. That would take years and years and years to digest, during which time growth would probably be wretched.

What's an investor to do? Bond king Bill Gross recently ranted on the no-growth economy and concluded, "Why not just buy utilities if that's what the future American capitalistic model is likely to resemble?”

I couldn't agree more. You can buy companies like Southern Company (NYSE: SO  ) , Verizon (NYSE: VZ  ) and Consolidated Edison (NYSE: ED  ) with dividend yields approaching 6%. If the economy grows at 2% or 3%, you probably won't be disappointed with those returns.

Matt Koppenheffer: While “recovery” may be in the cards, as investors we all have to figure out exactly what “recovery” means. With years of excess culminating with a massive financial supernova, I find it hard to expect that the U.S. economy will get right back to clicking along like nothing happened.

With plenty of consumer and government debt to deal with, aggregate demand in the U.S. will be constrained, leading to fewer growth opportunities within the U.S. borders. This will likely have the greatest impact on non-essential segments of the business world -- specifically consumer discretionary spending.

As a result, I’ve been focusing my personal investing on companies that produce “real” products, have considerable competitive moats to protect them from competition, and that are either not U.S.-based or have an international presence so that they can benefit from growth overseas even if they’re hurt by slower growth in the U.S. Along with that, I’ve been looking for stocks that pay dividends -- so that I get paid even if the stock doesn’t go up -- and are trading at below-market valuations. Stocks like Intel  (Nasdaq: INTC  ) , McDonald’s (NYSE: MCD  ) , and Johnson & Johnson (NYSE: JNJ  ) definitely fit the bill here.

Alex Dumortier, CFA: If PIMCO’s Mohamed El-Erian’s “new normal” thesis for the U.S. turns out to be correct, investors can change their focus in two ways to adapt to this reality (in the “new normal,” growth will be below the historical trend for the foreseeable future):

  • Sharpen your focus: In a booming economy, even marginal companies eke out growth; however, a sluggish environment magnifies the gap between great franchises and middling competitors. All things equal, you should prefer Visa (NYSE: V  ) to Discover Financial, for example. Differences in valuation can account for differences in fundamental quality, and while true franchises usually command premium valuations, that is not currently the case. Asset manager GMO expects high-quality U.S. stocks to beat large- and small-cap stocks by more than 6 percentage points on an annualized basis over the next seven years.
  • Broaden your focus: Growth slowed globally in 2009, but that doesn’t mean the pain of the credit crisis will be shared equally -- the Asian Development Bank estimates China’s GDP expanded by 8.2% this year and expects it to grow 8.9% in 2010. Emerging economies will grow faster than the U.S. over the coming 5-, 10- and 20-year periods, so it makes sense to have a significant portion of your assets invested abroad -- at reasonable valuations.

Those are our thoughts. Let us know yours in the comments section below.

This roundtable article was compiled by Anand Chokkavelu, who owns shares of McDonald’s. Discover Financial Services and Intel are Motley Fool Inside Value picks. Johnson & Johnson and Southern are Motley Fool Income Investor recommendations. Motley Fool Options has recommended buying calls on Intel. The Motley Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2009, at 1:32 PM, plange01 wrote:

    as the US gets set to move into its second year in a depression 2010 will be the year of the bankruptcy as thousands of already weak companys fail.

  • Report this Comment On December 28, 2009, at 1:42 PM, plange01 wrote:

    with the US a year into a depression airline stocks have been selling at ridiculous levels...

  • Report this Comment On December 28, 2009, at 4:52 PM, gimponthego wrote:

    Keep an eye on RAX. Having gained 180% this year on the heels of it's IPO..I buy on the dips. JOYG, so far off it's highs of November of '08.. $85+, is hard for me to not buy on the dips, pricey as it is.

  • Report this Comment On December 28, 2009, at 5:13 PM, parcheymex wrote:

    I am retired and living outside the US and so I invest rather conservatively. Here's what I mean: My ratio of equities to fixed income is 28% to 71% with only

    1% cash. My equities are diversely spread around

    the world with 97% of it international/emerging markets and 3% in the US. I intend to pay very close attention during 2010 because it does not take

    a hard thump to alert me to a wobbly market. I expect the US economy to grow very slowly, if at all.

  • Report this Comment On December 28, 2009, at 5:48 PM, peters46 wrote:

    Plange01 - I agtree - ridiculously expensive. I looked at airline industry twenty years ago. The only ones making money were the execs and suppliers. According to a recent report, that appears to still be the case. There was one exception twenty yrs ago (just like today) and in one quarter the exception lost more money than their total lifetime earnings.

  • Report this Comment On December 28, 2009, at 8:23 PM, xetn wrote:

    I think we need to stop looking at GDP as any indicator of real growth because it includes government spending. Since government spending does not produce any sustainable growth, except government employment, GDP is a worthless measure.

    I am currently living in China, and if you were to remove government spending, I believe China's GDP would actually be down, not up. The same is certainly true of the US, considering the stimulus and budget deficit.

    My conclusion is that most countries are actually flat lining because they are all doing the same thing (trying to inflate themselves out of the recession/depression.)

    Another interesting bit of information that I read over the past weekend was that real wages peaked in the 1970's and have been decreasing since. Another example of the waste of inflating the money supply, leading to a great loss in the purchasing power of the dollar.

  • Report this Comment On December 28, 2009, at 10:15 PM, OPTIONNUT wrote:

    The PIMCPO Boys are so conservative they squeek and they really like Bonds! Boring Boys as well................!

    Here's a suggestion for 2010, with the expected growth in China why not buy stocks of equipment makers and metals producers that will be in high demand in their continued expansion.

  • Report this Comment On December 29, 2009, at 1:31 AM, majomac wrote:

    "Everyone" knows the US will trail emrging markets, and deleveraging will continue for a long time. This should result in a weak US dollar. Watch carefully; there'll be huge upside in stocks which can use the amply supply of US workers, the depressed dollar, and the enormous demand in other countries to earn foreign capital. US business practices, terchnology and work habits aren't going out of style anytime soon!

    A Canadian

  • Report this Comment On December 29, 2009, at 12:18 PM, Kangman wrote:

    I recently read an article stating how Warren Buffett and John Bogle stated the very same thing in 2001 or 2002 about the "New Normal" and how returns would be in the 6% area for a long time. Granted the market tanked in 2008, but up until then, the returns were pretty good. I just don't think we can predict anything in terms of where the market will go.

  • Report this Comment On December 29, 2009, at 5:31 PM, sentinelbrit wrote:

    Everybody loves emerging markets. It was like that in the early 1990s and then the bubble popped big time. Yes, I know emerging economies are more stable now than in the 1990s. However, this crisis proved that the rest of the world cannot prosper without a prosperous U.S.. China, Brazil and India have recovered because of massive worldwide stimulus. A slow growing US economy will mean slower growth in emerging markets.

    Having said all that, I'm not convinced the U.S. consumer is going to be as frugal as everyone assumes. It's hard to change the materialism that is engrained in this society. My guess is growth will continue to pick up , people will feel more secure in their jobs, house prices will stop falling and all those who have sat on the sidelines waiting to buy a house will pour out into the market. House prices will start to go up, people will feel better off and start buying discretionary items again. There must be a lot of pent up demand out there.

    The market is already discounting some of this. As sure as night follows day, there will be a correction but then I think the market will grind its way higher. I expect about 10% total return from stocks this year, but as always, good stock picking can add to this.

    But what do I know?

  • Report this Comment On December 29, 2009, at 5:33 PM, sentinelbrit wrote:

    Note - I meant in 2010 - not this year.

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