The annualized growth rate for the United States economy was approximately 2% for the first half of this year. Given the massive amounts of monetary and fiscal stimulus from the federal government, this growth rate is considered anemic at best, and certainly not sufficient to bring down the high level of domestic unemployment.
For the second half of 2011, economists are predicting a growth rate closer to 3%. They do not expect any improvement in 2012 since monetary authorities are gradually reducing the stimulus added over the last few years. We need to develop investment strategies that work in a slow-growth economy.
BWFA’s investment philosophy has always been to create well-diversified portfolios that meet the income and risk requirements of our clients. Global cross-currents that affect the U.S. bond and equity markets are often unpredictable, so diversification is critical. Even if we could predict wars, droughts, floods, and tsunamis, their effect on the U.S. markets is different each time. Within the framework of a diversified portfolio, we can make subtle adjustments, often reflecting sectors to avoid (which may be as important to our clients as the sectors to emphasize).
Given the current investment environment, we will maintain the following investment themes for the second half of 2011:
- Utilities, consumer staples, internet security, cyclical stocks, and global infrastructure
- Longer-duration fixed-income securities
Offering yields of 4% to 5%, utilities provide current income and a place to hide out in a slow economy. When economic growth picks up, demand for electricity will rise, and utilities will have additional income to raise their dividends and thus keep up with rising interest rates.
Large-cap manufacturers of consumer staples, such as Colgate Palmolive, HJ Heinz, and Campbell Soup, make up a good portion of our growth-and-income stocks and offer yields over 3%. These companies have the ability to pass along increased commodity prices to consumers, so they offer protection in both a slow-growth and inflationary environment. Many of these stocks are at 52-week highs, but still offer relative value for our clients.
Professional hackers have become a major threat to consumers, corporations, and government entities. Internet stocks such as Websense and Symantec have grown between 10% and 20% this year, and we expect that their services will be in even greater demand in the future.
Worldwide economic growth continues, however slowly. If growth happens to be stronger than expected, then cyclical stocks such as Dow Chemical, Johnson Controls, 3M, and United Technologies will likely lead the market. Because of the weak first half of 2011, right now these stocks have reasonable price-to- earnings ratios and good dividends. They offer good potential for growth, when purchased in harmony with a client’s risk profile and asset allocation.
Massive amounts of money are being spent on improving the infrastructure in the developing world and replacing decaying infrastructure in the developed world. We think that companies like Caterpillar and Fluor are well-positioned to take advantage of these opportunities. Smaller companies such as Insituform Technologies, which provides technology to efficiently replace aging water and sewer pipelines, and Itron, which provides meters that allow for “smart” usage of gas, electricity, and water, should participate in the global infrastructure build-out as well.
Longer-Duration Fixed-Income Securities
With the 10-year US Treasury Note delivering less than 3% interest, it should not be a surprise that we are underweight on fixed-income securities and are avoiding all longer-dated securities. Eventually, interest rates will rise, and long-dated securities are severely exposed to that risk.
A final note: although these are our themes for the second half of 2011, there may be specific reasons to emphasize other sectors in individual client portfolios. You should consult with your BWFA advisor.