America still weak, but no global recession: Vaillancourt

By Bryan Borzykowski | April 8, 2008 | Last updated on April 8, 2008
4 min read

Despite a major slowdown in the American economy, we’re not seeing a global recession, says a senior Franklin Templeton executive.

Paul Vaillancourt, senior vice-president and director of portfolio strategy for Fiduciary Trust Company of Canada, the high-net-worth division of Franklin Templeton Investments, says an economic decoupling from the U.S. has saved the rest of the world from financial ruin.

“The economies of the world are less reliant on the U.S. consumer than they used to be,” he told reporters during a conference call on Tuesday. “Local factors are more important to local economies than ever. What we’ve seen is not a global meltdown — definitely a global slowdown and financial crisis in the U.S. — but certainly not a global recession.”

The markets, he says, are deleveraging and repricing risk appropriately, something that wasn’t happening earlier in the year. Now, though, markets have bounced back from oversold levels, and “some stability will return,” he says.

Because of this, his investment approach is still pro-equity. He also thinks the markets will see better returns in the latter half of 2008.

While Vaillancourt is adamant there is no global recession, he’s not ready to say that America isn’t undergoing its own economic collapse. He explains that we won’t know until the summer at the earliest if the U.S. is in fact dealing with a recession.

“If a recession is two negative quarters of growth, then it’s quite possible that the U.S. is in a recession right now,” he says. “But we won’t know until the figures are printed.”

He adds that he’s spoken to a number of strategists around the world, and they’re split on whether or not America is in a recession.

Andy Maclean, director of private client investing, and Clancy Ethans, senior vice-president and CIO at Richardson Partners Financial Group (RPFL), both think the threat of a U.S. recession could be over. In a report released Tuesday, they say the credit spreads are about as wide as they’ve been through other credit crises, “which suggests that we could be close to seeing the worst of this.”

They explain that the TED Spread — the spread between U.S. Treasuries and the London Intebrank Offered Rate — is narrowing, which points to liquidity returning to the global banking system. However, there are other indications that corporate credit spreads haven’t contracted yet, which means that there is still a high level of fear.

Besides the possible narrowing of spreads, the RPFL report says stocks are cheaper now than at any point during the 1980s recession. “Apparently, a fairly severe profit contraction and difficult economic environment are being priced into stocks,” writes Maclean and Ethans. “We’ve already seen a 19% decline in profits, which happens to line up with the long-term average profit decline seen during a recession.”

In other words, with credit spreads about the worst America has seen and profits declining as much as in previous recessions, the U.S. may have hit rock bottom and is slowly recovering.

For Maclean and Ethans to be completely confident that the American economy is bouncing back, though, they need to see “a clear move toward contraction in interest rate spreads for all credits” and a “move toward monetary easing by the European Central Bank.”

“This occurrence should not reduce any additional downside risk,” they say, “but could provide the catalyst to move markets higher through the remainder of the year.”

Vaillancourt also thinks that the American economy is on the mend. He says there are “encouraging” signs that markets have bottomed out. He points out that exports are “flourishing” and that the sub-prime mess, for the most part, hasn’t leaked to other parts of the economy.

In fact, Vaillancourt sees a lot of opportunity down south. “U.S. stocks are looking pretty good from a growth and valuation point of view,” he explains. “We’ve been underweight in the U.S. stock market for years. Now we’re starting to see some real value there.

As for the Canadian economy, it’s no surprise that manufacturing is still suffering, but there should be a slow decrease in demand for commodities.

And while financials took a big hit, Vaillancourt says Canadian banks are much better capitalized than their American counterparts. “Financials have already bounced back from oversold levels,” he says. “All in all, Canada is still a solid place to invest.”

With the American economy likely improving in the second half of this year, Vaillancourt says people should stay invested long term. “Stay the course and resist the urge to get too bullish early, but resist the urge to be too bearish and cash in the chips.”

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Bryan Borzykowski