Pundits on the annual Global Conference "tea leaves" panel (video available here) said they expected the U.S. economy to grow slowly with stubbornly high unemployment. Nonetheless, a lower dollar, growth in emerging markets and a restructuring of the U.S. financial system will provide investment opportunities.
"We're coming into a low-return environment," said Peter Gunning of Russell Investments. "It will be a harder slog. Investors are actually going to need skills as opposed to just having the tide rise."
Not surprisingly, some of the best opportunities will reside in the hardest-hit areas, notably the financial sector. Banking analyst Meredith Whitney said that as major banks withdraw from their traditional lending activities, they are unloading parts of their businesses "that you never could have dreamed of accessing." Lending to small and medium-sized businesses is being curtailed, while as many as 1 in 5 deposit customers are being dismissed. The percentage of consumers without a banking relationship will rise from 26 percent to the low-to-mid 30s, she said.
"This will be a major theme of the next 10-plus years, just as it was in Japan when their banking system collapsed," she said. "Those who are motivated can put those pieces back together."
Higher taxes and fiscal deficits, although a drag on growth, will create hot demand for annuities, tax deferral and other financial services, said Guggenheim's Todd Boehly. Similarly, the growing need for private capital to finance infrastructure will open opportunities for investments and new public-private partnerships. These vehicles will be a boon for retirees desperate for steady cash flow.
Global macroeconomic imbalances also will drive investment opportunities, said Nick Calamos of Calamos Investments. "We're going to try to internationalize [the debt] and inflation will follow," he said. This will help exporters and give a boost to manufacturers who, in turn, will be able to absorb millions of unemployed workers. He predicted that in the coming years domestic demand in China's economy will rise from 35 percent to 50 percent, while the rate in the U.S. will drop from 71 percent to the mid-60s.
Panelists expect interest rates to remain low, with Whitney predicting they will stay lower longer than "anyone imagines." Behind her call: an expectation that when QE2 ends in June, the Fed will pressure banks to move some of their $1 trillion in reserves to higher-yielding Treasuries.
Finding tomorrow's winning stocks will require a deeper understanding of the rapidly emerging global economy, panelists said. "We're in a more volatile and globally connected world," said David Solomon of Goldman Sachs. "We're still early in the cycle of people really understanding the effects of a global economy."