ING Investment Management U.S. market strategists might not agree on everything, but one notion is clear: the U.S. will avert a recession in 2012.
Chief Market Strategist Douglas Coté said record levels of earnings, an all-time record high of aggregate consumer spending, and booming production by companies like Caterpillar are reasons for optimism.
“Everything that we’ve been hearing about the market says that we’re heading for Armageddon, and what I find is that’s not true,” Coté said.
Investors should not be swayed by the focus on global risk and ignore other, fundamental drivers of the markets, Coté said.
There are many opportunities to invest in mid-cap companies, which Coté calls the “sweet spot of the equity market.” Mid caps have almost the same access to capital as large caps, but also have the growth prospects of small caps, he said.
Of the three-member ING Investment Management U.S team that spoke on Wednesday, Coté, a self-described contrarian, was the most optimistic.
Growth will be slow and painstaking next year, according to Paul Zemsky, ING Investment Management's chief investment officer of multi-asset strategies, with unemployment probably remaining at 9%. That will play a major part in keeping wages low, Zemsky said.
Unemployment probably will not drop to 8% until 2013, but Coté said the labor market could achieve that as early as next year. Coté also sees opportunities in global real estate investment trusts, or REITs, as commercial properties are expected to continue to perform well internationally.
“Focus now on the fundamentals,” Coté said. “We are marching forward, and I’m expecting an end of year rally.”
When it comes to credit products, ING Investment Management U.S is buoyant in its general outlook. Still, it takes a strategic and consistent investing approach.
Traditionally, November through February is the strongest period for positive excess returns. If U.S. growth remains strong, the trend should continue, said Christine Hurtsellers, ING Investment Management's chief investment officer of fixed income and proprietary investments.
At this point, Hurtsellers said, she is not worried about emerging market economies causing a precarious growth bubble. “They are going through a traditional business cycle,” she said.
Yet she expects to lower exposure to countries with account deficits, like South Africa and Turkey. Similarly, investors should temper their expectations for buying emerging market debt.
“They [emerging markets countries] don’t necessarily issue as much debt as U.S. investors want to buy,” Hurtsellers said.
Despite the generally positive outlook, the ING Investment Management U.S team pointedly expressed near-term concerns. It is critical that the so-called deficit reduction Supercommittee comes up with a viable proposal to cut the deficit by $1.2 trillion, and that Congress approves it. If deficit reduction efforts fail, then the federal deficit could reach 100% of GDP by 2012, and just shy of 160% by 2031, Zemsky said, citing figures from the Congressional Budget Office.
“We are optimistic that we’ll get something out of the Supercommittee, but if we don’t it will be problematic,” Zemsky said.
Of the 450 companies that so far have reported third-quarter earnings, 300 had positive earnings surprise ratios. Companies on the S&P 500 had a record $102 per share in second-quarter earnings, Zemsky said. But firms are still holding back on hiring and increasing dividends, he said.
ING also pointed out in its update that companies are concerned the banking sector will keep credit tight, despite the low-interest-rate environment. That’s one reason firms are more inclined to maintain cash reserves to fund expenses, the strategists said.
Another concern is the widening gap between middle- and upper-middle class Americans and those on the lower end of the spectrum. Disposable income per capita is stagnant, and with unemployment steady at around 9%, wage increases are unlikely, Zemsky said. Retail sales numbers are healthy, but that’s mainly because the top 20% of Americans are driving spending, according to Zemsky.