U.S. Economy May See Its Slowest Recovery Since 1945

The U.S. recovery may be the slowest since World War II to regain all the ground lost during the recession, even if economists’ more optimistic forecasts for expansion turn out to be right.

The slump this time was so deep, said JPMorgan Chase & Co. chief economist Bruce Kasman, that the 3.5 percent average quarterly growth rate he sees in the next year won’t be enough to bring gross domestic product back to its $13.42 trillion pre- crisis peak. That’s in contrast with the last 10 recoveries, when GDP returned to its previous levels within 12 months.
The result: A year after the Lehman Brothers Holdings Inc. bankruptcy helped drive GDP down to an annualized $12.89 trillion in the second quarter, there’s still “plenty of malaise,” Kasman said. Unemployment may remain close to the current 26-year high of 9.7 percent through 2010, upsetting voters ahead of mid-term Congressional elections and forcing officials to keep interest rates near zero and the budget deficit around this year’s record $1.6 trillion.

“This will be the most disappointing recovery,” said Kasman, whose forecast compares with the median estimate of 2.5 percent growth in a Bloomberg News survey of economists.

The U.S. might not recover the 6.9 million jobs and the $13.9 trillion in wealth lost during the recession until about the middle of the decade, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. The unemployment rate may never get back down to the 4.4 percent low of 2007, he said.

Cyclical Revival

Stock prices may take three or four years to reach their previous highs as the cyclical revival of the economy gradually boosts corporate profits, said Allen Sinai, chief economist at consulting group Decision Economics in New York.

“It will be a bull market, but not a roaring bull market,” Sinai said. He sees the Standard & Poor’s 500 stock index rising to 1,100 by the end of 2009 from its close of 1,042.73 on Sept. 11. The index hit a record 1,565.15 on Oct, 9, 2007, and then fell to a 12-year low of 676.53 on March 9, 2009.

Companies, particularly retailers such as Macy’s Inc., may have to adjust as consumers buy less. Household spending as a share of GDP might fall to its long-run historical average of 65 percent from 70 percent in the past decade as people opt to save more, according to economists Peter Berezin and Alex Kelston, of Goldman Sachs Group Inc.

Biggest Drop

The restrained performance that is forecast for the economy reflects both the depth and the origins of the recession, which began in December 2007. The 3.9 percent decline in gross domestic product was the most since World War II.

While Nippon Yusen K.K., Japan’s largest shipping line, has been able to raise rates on container services to the U.S., it continues to lose money on the business. Mikitoshi Kai, head of investor relations for the Tokyo-based company, said in an interview that “we need to increase rates by a lot more to make a profit.”

The decline has been a “balance-sheet recession,” says Richard Koo, chief economist at Tokyo-based Nomura Research Institute. Those take time to recover from, as once highly leveraged banks and consumers gradually reduce their debt, he said.

Fed Outlook

Policy makers may have to keep interest rates low and the federal budget deficit high to push the economy forward as financial institutions and households adjust. Federal Reserve Chairman Ben S. Bernanke and his fellow central-bank colleagues might hold their target for the federal funds rate between zero and 0.25 percent through 2010, said Kasman at JPMorgan in New York, the second-largest U.S. bank. That’s the rate at which commercial banks lend each other money overnight.

“The Fed may need to maintain fairly low interest rates over a period of many years,” Berezin and Kelston, of New York- based Goldman, the fifth-biggest U.S. bank, wrote in a Sept. 9 report.
On the fiscal front, the deficit will total $1.29 trillion in the year starting Oct. 1, boosted by a $787 billion stimulus package and aid to banks, according to Maury Harris, chief economist in New York at UBS Securities, a unit of Zurich-based investment bank UBS AG.

“I suspect the deficit will continue to balloon for years,” said Kenneth Rogoff, a former chief economist at the International Monetary Fund who is now a professor at Harvard University in Cambridge, Massachusetts.

‘Wild Card’

The “wild card” is the political impact the economy’s chronic difficulties will have on mid-term Congressional elections in November 2010 and beyond, Kasman said.

Democratic lawmakers in the House of Representatives are particularly vulnerable if voters blame President Barack Obama for a sour economy, said Nathan Gonzales, political editor for the Rothenberg Political Report in Washington.

Since 1945, the party that controls the White House has lost an average of 16 House seats in a president’s first midterm election, according to the Cook Political Report. Obama’s Democratic Party currently has 256 seats in the chamber, compared with 178 for the Republicans.

In the past, deep recessions have often been followed by rapid recoveries. That’s what happened in 1982-83 as the economy surpassed its previous peak in about six months, thanks to a 7.2 percent surge in growth. Behind the turnaround: aggressive monetary easing by the Fed, which brought short-term interest rates down to 8.5 percent from 15 percent in 1982.

No ‘Gas’

“We thought that if we really stepped on the gas, the economy would take off, and it did,” said Lyle Gramley, a senior economic adviser for New York-based Soleil Securities who was a member of the Fed’s board at the time. That option isn’t available to the central bank now as the overnight interbank rate is at zero.

The Fed has also been hampered by a credit crunch that has restricted the flow of money from lenders to borrowers, Gramley said. Banks, faced with mounting credit losses, have tightened terms and standards on loans to businesses and households since the middle of 2007, according to the Fed’s tri-monthly survey of lending officers.

That’s akin to the situation in 1991-92, when tight credit in the wake of the savings-and-loan crisis restrained the recovery, according to Gramley. It took about nine months for the economy to return to pre-recession production levels as growth clocked in at an average 2 percent.

Borrowing Falls

Household borrowing fell by a record $21.6 billion in July to $2.5 trillion, the Fed reported on Sept. 9. The drop was the sixth straight monthly decline, the longest since the 1991 credit crunch.

Behind the fall: Banks are becoming stingier in handing out credit while consumers are growing more wary of taking on more debt. The savings rate rose to a 14-year high of 6 percent in May before falling to 4.2 percent in July, government data show. It was 1.3 percent at the start of 2008.

Retailers are taking notice of the increased consumer thriftiness, including Cincinnati-based Macy’s. Chairman and Chief Executive Officer Terry Lundgren told Bloomberg Television on Sept. 8 that the second-largest U.S. department-store company has reduced inventories “fairly significantly.”

Home builders may have to adjust, too. Sales of new houses jumped 9.6 percent in July, the most since February 2005, to a 433,000 annual pace. That was still less than half the 923,000 average since the start of 2000.

The increase in sales has helped boost the price of copper. Copper for delivery in three months closed Sept. 11 at $6,250 a metric ton on the London Metal Exchange. That compares with $3,231 on Jan. 2 and a high of $8,730 in April of last year.

“There were huge excesses built up during the expansion,” Sinai said. “It may take the economy a few years to get back to its previous peak.”

Source: http://www.bloomberg.com/apps/news?pid=20601109&sid=aBj5AeyQqun8

Aggressive Intent

JM Financial Mutual now functions without any CIOs for either equity or debt.
The fund managers report to the Investment Advisory Committee, which comprises of board members.

Poor performance of equity schemes in the market downturn has hit the fund's reputation. And with the banning of entry loads, this AMC, known for its high upfront commissions, has a tough task ahead.
Bhanu Katoch, CEO JM Mutual Funds, shares his views on these very issues.

JM Financial Mutual Fund was the blockbuster during of the bull run of 2006 and 2007, only to hit rock bottom after that. What will you be doing to revive performance?
When the equity markets were in the bullish phase in 2006-2007, most of our mid-cap and large-cap schemes performed extremely well. They surpassed the indices by a huge margin. In the year 2007, Sensex delivered 47 per cent and the BSE Midcap index returned 68 per cent. Our large-cap category of funds gave a 1-year return in the 45-50 per cent range while our flagship funds delivered in the 90-111 per cent range. In fact, a few of our schemes figured in the top 50 Lipper world rankings.
The year 2008 witnessed the most severe fall in the history of the Indian stock markets. Sensex fell by 52 per cent and BSE Midcap index fell by 67 per cent. Against this, our flagship funds fell by around 65 to 75 per cent.
We believe that in India, growth as a strategy will tend to do exceptionally well over a longer period of time. So a high beta/alpha strategy portfolio will always deliver. We believe that our investment style will offer substantial alpha as and when confidence starts to come back and money starts chasing growth countries and growth stocks! If you look at the recovery period between March 5, 2009 and June 4, 2009 and even the period following that, JM schemes have done much better than the indices and even the peers. JM Basic Fund delivered 154 per cent during that period and JM Emerging Fund delivered 135 per cent. Our other equity schemes gave returns in the 70-150 per cent range. During this same period, the Nifty returned 77 per cent and the Sensex, 83 per cent.

Was that the reason for your relative underperformance in 2008?
Our underperformance was due to lack of cash and also due to our high beta/alpha strategy that definitely did hurt us in an exceptionally bad year.

What stopped you from going into cash?
Had we taken one, we would have performed better but having said that, a 2008 kind of year comes only once in 50 years or so and, therefore, it can't become the basis for any change in our fund management style. We do not believe in taking aggressive cash calls and only in extreme conditions will we use cash as a strategy.

What are you saying to your investors right now?
Our equity funds will stay true to their respective mandates. But we will ensure that while we stay with a high beta/alpha strategy, we do that with more liquid names.
So funds where the mandate is growth will continue to focus on growth even at the cost of short-term volatility. Most of our schemes have a mandate to chase growth and we will stay true to that even in the future. We believe the growth approach will provide maximum rewards to investors as India continues on its path to becoming an economic superpower.
So you are basically saying that your schemes will do well when the market picks up.
We feel that after a bit of consolidation the market will move up and we may see 17,000 within the next 6 months. In the next 2 years time we expect Sensex to rise above 25,000. Our schemes are well positioned for this kind of an upturn.

You spoke about more liquid names. Have you put any process in place to ensure that you do not have undue exposure to illiquid stocks?
All the liquid names in 2007 became illiquid in 2008. And what happened took the entire market by surprise. But several measures have been put in place since then. We have strengthened our parameters on stock and sector concentration, and stop-loss limits. Our risk parameters now have multiple "flag-off" levels which are more stringent than the regulatory requirements. We also have a more pragmatic approach towards risk management with multiple checks and balances. All these act as pointers for the fund management team to proactively balance the risk-reward aspects of their respective portfolios. And the IAC now has a greater role to play.

How do you want investors to perceive JM Mutual Fund?
We manage funds in 4 broad categories: equity, long-term debt, short-term debt and arbitrage.
On the equity side, we will stick to a high beta/alpha strategy. We believe that our investment style/growth approach will offer substantial alpha to investors in a growth market like India.
We are well known for our debt fund management capabilities. Even in the liquidity crunch crisis of October 2008, we did not resort to availing credit from the RBI's special window. We were the first to start arbitrage funds and are doing well in that category. We will soon be launching our PMS. Unfortunately in India, PMS is more a structured product with passive strategies. We may also start with similar products, but over a period of time we will look to innovate in this space.

You are a very small fund house whose equity returns got hammered in the fall of 2008. The competition is huge and that too from large and well established players. Is that not challenging?
I believe that the potential for growth of mutual fund industry in India is huge. One can easily compare that to any emerging market where the industry is large. If we take average AUM as a percentage of GDP, it is pegged at around 10 per cent in India compared to 80 per cent in the U.S. Even if you look at mutual fund AUMs as a percentage of bank deposits, it is only around 20 per cent in India as compared to 140 per cent in the U.S. Big-to-small is a wrong way to look at things. Finally, it will be the fast that will beat the slow! We want to focus on delivering performance and offering superior service standards to our investors and partners.
Recently, JM Financial Asset Management Pvt. Ltd. divested an 8 per cent stake equally to two global institutional investors, Valiant Mauritius Partners FDI Limited and Blue Ridge Affiliates, namely BRLP Mauritius Holdings II and BROMLP Mauritius Holdings II, respectively. This sale of stake brought in Rs 63.86 crore. Prior to this, the AMC's paid up equity capital was Rs 54 crore. These players will add significant value from a global markets perspective.

How big is the investment team?
The equity team comprises of 10 members 4 fund managers, 2 dealers and 4 research analysts. On the debt side, we have a 5 member team comprising of 2 fund managers, a credit appraisal head, a dealer and a research analyst.

With no CIO in place for either debt or equity, who oversees the team and guides them?
Our fund management team is very strong and has substantial experience. They are accountable to the CEO and the IAC.
The team works very closely with the IAC that meets once every 15 days.

Your fund house is supposed to pay the highest upfront commission of 1.50 per cent. Will that hold you in good stead now that entry loads have been banned?
Because of the banning of the entry loads businesses will become more capital intensive. In the short term we will all need to work hard to adjust. But soon the industry will move from a high-margin-low-turnover model to a low margin-high-turnover one.
The institutional segment still contributes some 50-60 per cent of the AUM. In the coming days you will see retail contributing big time to the growth of the industry. Mutual fund penetration is still restricted to the top 8 cities and about 3 per cent of the households have invested in funds. There are 5,545 urban towns and 6,40,000 villages with a rural-urban mix to the ratio of 70:30. Incrementally, prosperity levels and literacy levels are going up and that means huge scope for growth.
IFAs will play a very critical role in the industry's growth. Once the PSU banks start selling mutual fund products, the penetration levels will only increase. There are 300 commercial banks with 72,000 branches.

Source: http://new.valueresearchonline.com/story/h2_storyview.asp?str=100796

MF industry to see consolidation, says Mirchandani

In an exclusive interview with Harsha Jethmalani of Myiris.com, Mohit Mirchandani, Head Equity, Taurus Asset Management gave his views on equity markets and investment strategies.

>Do you expect the euphoric mood of the stock markets to last much longer?

Depends on the time horizon, short term, I expect a decline that will dent the euphoric mood temporarily. Medium and long term, we will be back on track to scale higher levels.

>Given the current trends in equities, which are the sectors you are watching closely?

We like the agro space, infrastructure theme, healthcare and consumption themes, oil and gas.

>Coming more specifically to your funds - what is your investment strategy? What are the key criteria you have in mind while selecting a stock?

The underlying philosophy is to look for favorable risk reward ideas. Constructing our portfolios involves multiple steps…
Step 1: We identify themes and sectors that we believe will play out over the next 12 – 24 months.
Step 2: We then select stocks on a bottom up basis within these high conviction themes.
We may also identify stocks that do not fit any larger theme, but are very good companies with good prospects, managed by capable professionals and have clean financials.

>As far as Taurus Ethical Fund is concerned you are overweight on the consumer non durables sector. Can you elaborate?

We are optimistic on the consumption theme in India. The companies within this space are high quality companies with huge cashflows, high ROE`s. We are optimistic on the consumption story.

>What innovative products can we expect from the company in near future?

We are constantly working on product ideas. When the time is right, we`ll launch the appropriate products.

>Do you think an equity fund should be fully invested or it should take active cash calls?

I think a fund manager should not hesitate from taking cash calls. Protecting an investor`s wealth is equally important.

>In these tricky times, how should an investor plan his investment?

A financial advisor is best positioned to deliver that advise based on the individual investor profile and needs.

>Where do you see the mutual fund industry a couple of years from now?

There will be consolidation. The temporary effect of SEBI`s announcements will be overcome – its a painful transition.

Source:http://www.myiris.com/newsCentre/storyShow.php?fileR=20090915113742173&dir=2009/09/15&secID=livenews