The main driver for the global economy is coming from emerging markets, said investment experts at Morgan Stanley Smith Barney at a breakfast in New York City on Wednesday on the firm's outlook for next year.
“We think we are in a multi-year bull market that began in March 2009,” said Global Investment Strategist Charles Reinhard. “We have been saying that since April 2009 when conditions were lining up- low inflation and inexpensive pricing. There is an opportunity in equities.”
Reinhard sees a two-speed recovery, with the emerging market growing at 6% and the developed world market growing at 2%. That’s because U.S. companies have recognized that the developing world has cheaper labor and are looking elsewhere for their workforce. This is painful for the American job market, but good for investors, he said.
Now that fears over the U.S. economy veering into a double-dip recession have been unfounded, equities are an extraordinary value, emphasized Reinhard. Currently, 56% of the global middle class is from an emerging market, according to World Bank data. By 2030, the prediction is that 93% of the global middle class will come from emerging markets. “That has powerful implications,” said Reinhard. “A middle class demands different things in their approach to food, fashion and even tourism.”
Twenty-nine percent of that new middle class will come from China. David Darst, chief investment strategist, agrees. “The U.S.-China relationship is the most important relationship for the prosperity of the world,” Darst said. “How this relationship is handled has a lot to do with the world’s progress and peace.”
To be sure, the U.S. is still in a recovery period and there are many challenges ahead, such as high unemployment and explosive debt. But, Reinhard pointed out, consumer spending is larger than it was before the recession began and nominal GDP is greater as well. Profits have returned to where they were before the downturn. Yet the stock market hasn’t caught up.
That’s where the opportunity lies. For this reason, the firm is overweight equities and overweight emerging market equities.
Meanwhile, MSSB is underweight bonds, though Jeff Applegate, chief investment officer, said within bonds there are some attractive assets, such as high-yield and emerging market debt.
“In 2011 our theme is recovery becomes expansion,” said Applegate.