In 2011 and beyond, investors should be long risk assets. “Only stocks work,” says Robert Manning, Boston-based CEO and CIO at MFS Investment Management. “Especially blue-chips that pay dividends.”
He argues that the S&P 500 is undervalued as much as 20%.
“It’s really simple, we just watch the Fed,” Manning says. He notes that the Federal Reserve Bank will continue with any means of quantitative easing it deems necessary to spur housing and other prices to rise, and to stave off a Japan-style deflationary spiral.
MFS, which manages both equities and fixed income, expects yields on Treasuries to rise further after the sell-off that hit the market last week. There remains considerable support for buying Treasuries not just from the Fed but from Asian central banks and emerging-market sovereign wealth funds. But the fundamentals don’t look good for bonds.
Yields remain very low, despite the recent sell-off; meanwhile, US economic data appears more benign than expected, particularly in light of the Obama administration-brokered deal with Republicans to extend Bush-era tax cuts on high earners.
Manning would not be surprised to see the US economy grow by 3% or 3.5%. Add on modest inflation from the consumer price index and one can argue that 10-year Treasury yields should really be closer to 5%, not the current 3%.
Manning says this benign environment is a reflection of America’s recovery from the financial crisis and recession. It’s a slow grind because of the severity of the downturn, but he believes the recovery is otherwise typical, including a rebound in consumption.
“This is a normal cycle,” he says, dismissing the Pimco-led notion of a ‘new normal’. “This isn’t a new normal, it’s just normal,” he says.
The big hurdle in the US political economy is unemployment, now officially nearly 10%, but in reality higher as more people have stopped seeking work. Manning believes the country is unlikely to return to the pre-crisis notion of ‘typical’ unemployment rates of 6%, which he labels a “dream” fuelled by the housing boom and the construction jobs that went with it.
The US, therefore, faces long-term fiscal problems because it will struggle to return to full robustness without regaining its manufacturing strength or addressing pension and healthcare costs.
But for investors, the US offers cheap valuations, and profitable, cash-rich companies with world-class franchises. “You don’t need a big change in the economy for profitability to continue,” he says.