The three R’s for James Swanson, chief investment strategist for MFS Investment Management, are recession, rehab, and recovery.
A summary brief of his recent mid-year outlook, presented earlier this month, pinpoints these three themes looking toward the second half of this year. Swanson advises investors to continue to seek opportunity from large-cap companies with significant revenue from non-U.S. markets, as well as health and technology stocks, which are proven to do well in similar environments.
Swanson says the dance around whether we’re in a recession is null and void and “it doesn’t matter,’ the brief says. A high probability of recession is already priced into several markets: bank debt, high-yield bonds, credit swaps, adjustable preferred, as well as parts of the stock market.
The reason the economy is still breathing, the brief suggests, is because interest rates and the real interest rate are lower now than at the beginning of previous recessions. Additionally, inventories are low; companies did not stretch their hiring, spending, and leverage capacity; emerging countries are gaining a greater share of the world economy; and the bull market in commodities is “roaring.’
Swanson suggests equity investors should continue to favor large-cap companies that get most revenue from non-U.S. markets. He also points investors to technology and health care stocks—both of which have held up well in similar environments, the brief says. Also ranking high on Swanson’s “opportunity meter’ include bonds—municipal, high-grade corporate, and high-yield.
Swanson suggests America needs to deflate its swelling credit problem. According to Bloomberg data cited in the presentation, the total U.S. credit to GDP ratio has rise to 3.45, meaning America finances nearly $3.50 to finance every dollar of GDP.
The presidential election could help economic recovery, as it historically rallies in the latter part of an election year. While the economy might be “at stall speed,’ the brief asserts that the low rates, falling housing prices, and Federal action to stabilize will lead to a “re-ignition,’ of the economy, with growth to come at the beginning of 2009.