Take shelter from the storm, but also take heart, was the message delivered by Avery Shenfeld, managing director and senior economist with CIBC World Markets, at a lunch seminar sponsored by CIBC Mellon on Wednesday.
Although fears persist about a recession in the U.S., the global economic outlook isn’t so grim. Emerging markets such as Brazil, Russia, India and China are driving the economy and lessening the demand for U.S. resources, says Shenfeld. He believes that global economic growth will continue to top 4%, even if the U.S. economy stalls.
Canada is also doing well—the unemployment rate is low, growth remains strong and the real estate market isn’t experiencing the same falling housing prices as in the U.S. Shenfeld predicts that the Canadian dollar will remain more or less at parity with the U.S. dollar for the rest of 2008, but believes that the Bank of Canada will continue to cut interest rates to keep it under control. “If we weren’t tied by that umbilical cord to the Americans, we’d have nothing to worry about,” he affirms.
The U.S. may be in for a rough ride over the next few quarters, but there are also some positive signs. For example, says Shenfeld, factory orders have picked up within the last few months, inventories remain low relative to sales and employment trends aren’t as low as they would normally be in a recession. And the declining U.S. dollar has helped make the U.S. more competitive globally. “It used to be that if you stamped something ‘Made in America,’ you might as well have said ‘Overpriced’ on it, because stuff coming out of Japan, Canada and Europe was all more price-competitive,” says Shenfeld, “That’s no longer the case.”
Of course, the U.S. real estate market remains a significant concern, as housing prices continue to fall. Already, says Shenfeld, 30% of U.S. houses bought in 2006 have mortgages in a negative equity position, meaning that the total mortgage is bigger than the value of the house. Banks face the ongoing challenge of keeping pace with the write-downs.
But calming investors’ fears may be the bigger battle. “Financial markets can talk an economy into recession,” says Shenfeld, noting that when investors are worried about investing in anything other than relatively low-risk securities, borrowing and capital spending doesn’t take place. “Risk really became a four-letter word,” he adds. Shenfeld believes that U.S. interest rates may go as low as 2% to help maintain liquidity, but he’s hopeful that this will be enough to stimulate the economy.
Instead of a full-blown recession in the U.S., Shenfeld predicts slow growth for most of 2008 followed by a rebound in the fourth quarter. But what should investors do in the meantime to weather the volatility? He suggests taking refuge in resource stocks, utilities and Government of Canada bonds. “The environment in the U.S. is the perfect storm for gold,” he adds.
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