Investing to avoid a lost decade

When it comes to investing, there are still opportunities out there—but you need to make sure you’re reaching for the right ones.

“Certain economies are going to do pretty well, largely the emerging markets, while others like the U.S. are muddling through,” said Michael Ryan, CFA, managing director and chief investment strategist for wealth management research, UBS Financial Services.

Speaking at a Calgary CFA Society event on Thursday, he reminded the audience of the pall hanging over the developed world: “One of the things we will have to face is there is simply too much debt.”

In his presentation, “Global Outlook 2012—Avoiding Another Lost Decade,” Ryan said consumers, corporations and governments across much of the developed world will have to downsize on a massive scale. Almost all of the world’s economic problems are G-7 problems, he noted, with the exception of Canada.

“The ongoing eurozone debt crisis has not been solved. They have moved toward a comprehensive approach, but have not reached a comprehensive solution,” said Ryan, who sees uneven growth across the globe, with the developing and developed world continuing to diverge.

In places such as the eurozone and U.K., where there are acute stresses, Ryan sees low growth or no growth.

“This is the weakest recovery we’ve seen in the post-war era,” he said, adding the economy will continue to gain traction and that employment markets will continue to improve.

Political uncertainty is a wild card, according to Ryan, who advises keeping an eye on upcoming elections in the U.S. and France, and on leadership transitions elsewhere in the world, including China and Russia.

For the U.S., meaningful fiscal consolidation will have to wait until after the 2012 congressional and presidential election, said Ryan, who sees a better than 50% probability that Barack Obama will be re-elected president, and a divided government again in the U.S.

“In an environment where growth is harder to find, growth will be rewarded,” said Ryan. He expects that growth to come from sectors offering cyclical and secular growth, such as technology, consumer staples and health care. “When you’re in the sweet spot of moderate profit growth, which is where we are now, growth stocks do very well.”

Investors should focus on where growth will be globally, he added. “It’s not a G-7 world any more. The emerging markets are contributing more to global growth than the developed world. Over the next three years, emerging markets could be as much as 20% of market capitalization.”

With no sign of interest rates rising any time soon, investors must look for ways to replace income. As the population ages, there will be more emphasis on trying to capture dividend income.

“Maintaining a mix of assets in a portfolio is critically important. Diversification does matter,” Ryan said. “We have to think differently about portfolios, we have to think holistically.

“The dividends we are able to generate on equities are relatively attractive, when you look at the yields on fixed income. But it’s not just about going out and buying high yield stocks, because sometimes those dividends won’t grow.”

He would rather focus on companies with the ability and will to grow their dividends in a consistent manner over time. This way, “your dividend income stream doesn’t remain static—it grows.”

In response to a question from the audience about the U.S. dollar, Ryan noted that forecasting currencies is very difficult, especially in the short term. He thinks the U.S. dollar will probably maintain its level against the pound sterling and the euro, and will largely lose value against Asian currencies, with the exception of the yen.