With the absence of a V-shaped recovery, we can expect to experience the ramifications of the financial crisis for a long time, with a great likelihood that we’ll see paradigm shifts in the years ahead, said Erik Weisman, investment officer at MFS Investment Management.
“We’re going to have excess capacity for a long time,” Weisman said. “We’re not going to have a V.”
During the firm’s Outlook Conference Tuesday, Weisman said the probability that we’ll see shifts is higher today than at any other time, which could make it difficult to determine asset valuations in the future. A paradigm shift could take the form of a different inflationary period characterized by more rapid swings or deflation. It could also mean a new dominant global currency, he said. In years out, we can expect credit rating agencies to focus more attention on the U.S., and the U.S. dollar will likely not be as prominent.
During his presentation, Weisman put up a graph illustrating the historical duration of “tranquil time,” or the number of years between the end year of a crisis and the start of a new crisis. Weisman said we’ll have to wait 20 years before we can feel confident that we won’t see another crisis for a while. “This is a long process.”
While MFS Chief Investment Strategist James Swanson would normally not recommend investing in stocks in such periods of slow growth, “that has completely broken down,” he said, during the conference. Slow U.S. growth no longer means weak S&P 500 earnings, as U.S. companies continue to build earnings and cash flow.
As of June 30, 2010, the ratio of corporate cash flow to non-residential fixed investment is at a record high of 112.4 percent, according to data by Ned David Research. U.S. corporate balance sheets have $428 billion in excess cash, according to JPMorgan data.
Swanson suggested investors consider technology and utility stocks in 2010. While the banks were the biggest earners three years ago, today it’s the information technology sector. Utilities offer the highest dividend payout of any other sector, with the exception of REITs, Swanson said.
He also said to opt for dividend-paying stocks in the near term, as these work particularly well in high inflationary periods. Since about 1984, the S&P 500 Dividend Payers Index has outperformed the S&P 500 Equal Weighted Index, and it is still doing so, according to Ned David Research.
