News & Press Releases

Strong Positioning For A Sluggish Economy

John Hakopian, President

July 15, 2010

Sluggish economic growth in the second quarter has played along with our initial forecast. The good news is that our conservative portfolio positioning has held well against the scenario, with positive results from our bonds and some of alternative investments. For stock holdings, double digit losses were in line with a broader market pullback, as with the S&P 500 falling about 11.5% for the period, and heavier losses for certain international benchmarks.

Heightened volatility in the second quarter was spurred on largely by concerns over Greece's solvency, which in turn sparked a contagion effect that spilled over into other European countries. At the same time, investors grew worried that China's efforts to slow its booming economy would end up slamming on the brakes too hard and derail a key global growth engine. Finally, US economic data showed signs of softening, with weakness in leading indicators and virtually no job growth. Clearly, we are seeing a slowdown in global growth as a result of the many headwinds. This played out with our forecast that consumer debt and spending would be sharply reduced this year.

We continue to feel the most likely scenario is that the global economy is entering a multiyear period of slow growth. We don't, however, see a double dip recession. The fastest growth will occur in selected emerging markets which have strong balance sheets, while much of the industrialized world, including the US, Japan, and especially Europe, will experience markedly slower growth than they have historically. This scenario will persist until the heavy debt burden weighing on so many countries around the world is finally dealt with. Until the structural problems of high deficits and debt are addressed, we're not likely to see a resumption of robust growth in the industrialized world.

As for portfolio positioning, we plan to maintain our conservative stance - but are also looking at opportunities as created by volatility. This falls in line with our main goal of preserving capital, while also looking to grow it. On the fixed income front, we continue to stay away from less attractive returns in government and investment grade bonds, though do see better potential with municipal bonds, emerging market bonds and high yield bonds. On the equity side, we are emphasizing both US large-cap multinationals and international stocks as valuations at 10-year lows pose bargains. Select alternative investments are also presenting attractive opportunities.

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