US Economy, Stocks Will Grow Faster Than Many Think: ING
The US economy and stock market are set to grow at a comparatively robust clip in the coming years—contrary to the gloomy forecasts from most economists, according to the global investment arm of ING Group.
Economists at ING Investment Management, a unit of Dutch banking giant ING , said Tuesday that they see the economy growing at an average 4 percent rate next year.
That's far more optimistic than most economists, who subscribe to the “new normal” paradigm in which the economy limps along at a 1 to 2 percent growth rate for several years.
Such a weak recovery would limit gains in stocks as investors move away from riskier assets and into safe havens such as bonds and other cash-based classes.
The latest pessimistic forecast came on Monday, when noted analyst Meredith Whitney told CNBC that she hasn't "been this bearish in a year," saying stocks are overvalued and the US economy will likely fall back into a recession next year.
"Our view is that in general, consensus is too pessimistic," Paul Zemsky, ING Investment Management's head of asset allocation and multi-manager investments, said at a news briefing laying out the firm’s philosophy.
Specifically, the firm listed three reasons it believes growth will be stronger than expected:
- Economic data has consistently beaten estimates.
- The stock market is "still relatively cheap and undervalued," Zemsky said.
- Federal Reserve policy will keep interest rates low well into the foreseeable future.
"Fed funds are going to be low for an extended period," said Zemsky, who attended Monday’s speech by Fed Chairman Ben Bernanke in New York. "That’s a great story for the equity markets. That’s a great story for financial institutions."
Echoing Zemsky’s optimism, Uri Landesman, the firm's head of global growth strategies, said the Standard & Poor’s 500 Index is likely on its way to 1,275 by the end of 2010, with 1,175 possible by the end of 2009. Those numbers represent a 12 percent improvement by the end of next year and a 5.5 percent gain by the end of the present calendar year.
One reason for his optimism: The US stock market’s rally actually has been slow in global terms.
"Strong as the US recovery has been, it’s actually been one of the more poorly performing markets in the world," Landesman said.
That will change, the ING managers said, due to continued progress from US companies both in cutting costs and simultaneously increasing productivity.
Third-quarter earnings have been a reflection of that, with about 80 percent of companies beating analyst estimates, and many have achieved that goal both with cost-cutting and revenue growth.
The result will be gross domestic product averaging around 4 percent starting in the third quarter of 2010, peaking at 4.5 percent in the second quarter of 2011 then leveling off to 3.8 percent for the final two quarters of 2011, according to ING’s analysis.
To be sure, the firm acknowledges the headwinds the market is facing.
Projections for unemployment remain pessimistic, with the rate to stay above 9 percent until the second quarter of 2011, when it dips to 8.6 percent.
A weak economic picture will reflect in consumer spending that will be grow only gradually as households shed debt and try to build up savings.
“People aren’t that flush. Income growth has been poor. The vast majority of people are living day to day,” Zemsky said. “The savings rate will rise gradually. It will be a tug on demand for the next five, six years. But it will not kill the recovery in 2010.”
Key for investors to remember, the ING officials said, is not just the face level of economic yardsticks like GDP and unemployment, but the levels from which they have risen.
Conversely, they should remember the lofty heights from which the stock market has fallen and keep in mind that the major averages are still nearly 30 percent from their historic highs reached just two years ago.
“While the change in the stock market from the (March 2009) bottom is very dramatic, the level of the stock market is below what we feel is face value,” Zemsky said.
As for specific investing areas, Landesman said the firm favors industrials, financials and technology, which will benefit in the coming holiday season from shoppers looking to catch up to the latest innovations after not spending all year.
“We think the world is too pessimistic about where the consumer is,” Landesman said.
In addition, he said the firm is bullish on Brazil, Russia, India and China—the so-called BRIC nations—but is wary of Japan, which he compared to the US auto industry and the way in which too few workers have to support too many retired people.
“They are totally dependent on exports,” he said. “As goes China, as goes the United States, so goes Japan.”
The firm also prefers municipal bonds over Treasurys and other debt because of their tax status.
“Basically you’re earning the same rate on a tax-free investment as you are for a taxable one, and for investors that’s a very good deal,” Zemsky said.
Investors also likely will do well by leaning on traditional recovery standbys such as consumer discretionary, energy and materials, and can expect continued growth in commodities, Landesman said.
Such growth, they said, is consistent with a recovery that will see an undervalued market receiving a natural bounce.
“There are long-term problems,” Zemsky said. “Our view is over the next four quarters…that the cyclical improvements will overwhelm the secular problems that we have.”