In a recent video conference with Bill McQuaker, a note of cautious optimism was sounded in his evaluation of the current economics. Touching on stimulus packages, the Green Shoots index, valuations and a positive earnings outlook, Bill shared how he’s positioning his investments against this backdrop.
Drawing a comparison between the Great Depression and the current crisis, the scope of current stimulus packages at 29.9% of the US GDP far outweighs that of the Great Depression which saw approximately 8% of US GDP in stimulus.
The consequent fall in GDP during the Great Depression was 27%, while from 2008 to 2009, the US GDP fell a mere 1.8%. While not a perfect comparison, it does give some sense of perspective, and that the stimulus packages are helping to cushion the economy.
The green shoots index, a compilation of news stories than mention ‘green shoots’, reflects the positive sentiment in the markets. The index has risen steadily since the start of 2009. This is further reflected in the positive earnings outlook, a point that we have also noted. In Global Financials to drive the new bull market, analyst Terence Lin writes,
“After two massive quarters of losses, earnings on aggregate were positive in the first quarter of 2009. Consensus estimates are also for net income to be positive in each of the remaining 3 quarters in 2009.”
Bill sees inflation as a likely outcome. He calls for caution on commodities, in particular oil, believing that demand for commodities will be more severely affected by the fall in demand from developed nations. While demand from developing nations will partially offset this drop in demand, the net result is still reduced demand for commodities.
The subsequent high inflation will also adversely affect bonds, in particular government bonds, whose low yields will be further compromised by rising inflation.
In light of these reasons, Bill favours defensive sectors such as utilities, healthcare and telecoms to outperform. Other defensive sectors include food producers, and pharmaceuticals.
In terms of geography, he likes Asia, including Japan. Most Asian countries hold deep reserves and healthy balance sheets, which adds to their allure and attractiveness as an investment destination.
For the third quarter of 2009, Bill expects more volatility and likely corrections. But he expects a recovery in the fourth quarter of 2009, and by Christmas 2009, a stronger performing equity market.
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