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
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
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.