The global economy is poised for several years of sluggish growth, and unprecedented levels of volatility will likely continue, but investors can find opportunities in defensive stocks, corporate bonds and hedge funds, according to David Rosenberg, chief economist and strategist at Gluskin + Sheff Associates Inc.
At the Toronto Board of Trade on Friday, Rosenberg told a financial industry audience how to help clients make money as economic turmoil continues. He admitted that it won’t be easy.
“At least the next several years are going to be a very difficult environment,” he said.
The U.S. economy is in for a particularly rough ride, according to Rosenberg’s outlook. In fact, given the weak economic fundamentals, he said the U.S. could very well experience another recession.
“I think the chances that the U.S. actually slips into a recession is higher than is being discounted right now,” he said.
He pointed out that the U.S. Federal Reserve’s latest forecast indicates that three years from now, at the end of 2014, the unemployment rate south of the border still won’t have fallen below 6.8%. This level of unemployment will cause the economy to continue operating at a level far below its true potential, Rosenberg says.
Huge amounts of debt also continue to plague the U.S. economy, both at the fiscal level and the household level.
“There’s still too much debt that has to be extinguished,” Rosenberg said.
The government continues to spend 60% more than it’s bringing in, according to Rosenberg, and demographics suggest that revenues will decline in the years ahead.
Households, meanwhile, are still in the process of repairing their balance sheets. He expects that it will take a total of seven years for U.S. households to cut their debt loads to a manageable level. Until that happens, Rosenberg believes the economy won’t return to a period of sustainable growth.
“We’re two years into a seven-year cycle,” he said.
The housing market also continues to weigh on the U.S. economy, and has not yet hit bottom, according to Rosenberg. He predicts that home prices will fall by at least another 15%, since there’s still far too much capacity in the market. “There’s still a ways to go,” he said.
Rosenberg’s outlook for Europe isn’t any rosier. As the debt crisis continues and spreads into core countries such as France, he suspects that the outcome could be a breakup of eurozone.
“We have to contemplate what kind of divorce this is going to be, how it’s going to look,” he said. “I don’t necessarily think it’s going to be the end of the world, but it is going to have repercussions for financial markets.”
Indeed, Rosenberg believes market volatility will continue. But investors don’t need to fear volatility; rather, he suggests they embrace it. Clients can do this though hedge funds that take advantage of the price dislocations and anomalies that result from volatility.
“Hedge funds that hedge progressively are actually a perfectly appropriate place to have your money,” he said. “They work best in a very volatile environment.”
Rosenberg also recommends investing in corporate bonds, since corporate balance sheets are in good shape, and in defensive stocks. He likes such sectors as utilities, consumer staples and health care.
“You have to be more selective in this kind of environment,” he says. “Your choices have become more limited, but the more defensive, the better.”