2009: The Good, the Bad and the Ugly
Mesirow Financial Event Examines Opportunities and Challenges

CHICAGO, December 15, 2009 — With speculation still prevalent about whether the economy is on the verge of recovery or has yet to bottom out, Mesirow Financial's business leaders provided keen insight on the economy and key investment classes at its sixth annual Investment Outlook event. The event, held this morning at the Chicago Marriott Downtown, and titled, "The Good, the Bad and the Ugly," was attended by more than 600 clients and colleagues. Mesirow Financial's leading experts assessed the opportunities, pitfalls and outright failures of 2009 and provided perspective on what lies ahead for 2010.

• The Economy (forecast by Diane Swonk, chief economist, Mesirow Financial)
  "A year ago, I argued that the riptide that dragged the economy down in 2008 had become more of a tsunami. The good news is that the economy seems to have improved since then. Real GDP rose 2.8% in the third quarter-the fastest pace in two years-and appears to be on track to post gains of similar magnitude in the fourth quarter. The bad news is that the overwhelming majority of those gains may be attributable to the transitory stimulus created by the Cash for Clunkers program and the first-time homebuyer tax credit. There is no guarantee that the recovery can be maintained once the fiscal stimulus plays out. For 2010, we expect GDP to be the 3-4% range.

  Historically, economists have UNDER rather than OVER-estimated recoveries. Overshooting on the downside, coupled with aggressive fiscal and monetary stimulus, often sets the stage for a bigger rebound than most anticipate. I believe that headwinds associated with the credit crunch will persist and limit the degree to which we can recover this time around. However, I will gladly eat crow and pop champagne corks if I am wrong and the economy improves more than I have currently forecast."

• U.S. Value Equity (forecast by Jeffrey L. Schvimer, managing director, U.S. Value Equity)
  "Economic improvements have been slow and labored and the market is searching for direction. We expect the S&P 500 to gain 5%-8% in 2010. Small cap stocks may perform similarly to large cap stocks, perhaps up 4%-6%, but are considerably riskier, given their recent strong relative performance. Earnings are likely to grow marginally in 2010, but probably without a boost from productivity gains. In fact, we expect margins to face some pressure and possibly to shrink from current 6+% levels into the high-5% range. Finally, we expect P/E multiples to revert to more normal levels throughout the course of the year. We anticipate that those shrinking multiples will put a cap on market appreciation, even as earnings growth resumes."

• International Equity (forecast by Leila B. Heckman, Ph.D., senior managing director, International Equity)
  "In spite of the global financial crisis, much of the equity marketplace continues to expand globally. We believe the market is ripe with opportunity yet, in order for the world markets to continue their upward trend in the short run, corporate profit growth needs to be vigorous and inflation mild. Analysts are forecasting earnings to grow strongly in 2010. For example, earnings are forecast to grow at 24% for the developed markets and 20% for the emerging markets. Although we cannot expect that markets will return 30% every year, we believe it is important to remain invested in the markets in order to take advantage of the next leg of the market rally whenever it may come."

• Fixed Income (forecast by Steven P. Luetger, senior managing director, Fixed Income)
  "Fixed income markets performed beyond everyone's expectations during 2009. During last year, bond market returns were dominated by falling risk premiums. Today, with the market seemingly split between those looking for deflation and those fearing runaway inflation, Treasury rates could be particularly volatile. Bond market returns in 2010 will be heavily influenced by the direction of interest rates."

• Private Equity (forecast by Marc E. Sacks, senior managing director, Private Equity)
  "While 2009 was a challenging year for private equity investors, the subsequent repercussions provide attractive opportunities and bode well for a well-diversified private equity portfolio, as well as setting the stage for more investor-friendly financing terms and structures. We believe that the enormous bid-ask spread that kept sellers of existing private equity portfolios on the sidelines during 2009, will narrow in 2010 as a handful of secondary specialists look to deploy very large funds. As an opportunistic secondary buyer, we will continue to take advantage of select opportunities to purchase quality assets at deep discounts to fair value."

• Hedge Funds (forecast by Stephen C. Vogt, Ph.D., senior managing director, Advanced Strategies)
  "It is our opinion that the key to success in hedge fund investing today is to diversify across a broad set of hedge fund strategies and maintain a balanced long-short approach. Focus for 2010 should be toward those that do not require directional views of either the equity or credit markets but rather offer low correlation. Directional strategies should be offset with short strategies in order to isolate uncorrelated sources of return. This balance will help to mitigate negative performance should the economy falter yet provide return through security selection in most other situations."

• Currency (forecast by Gary C. Klopfenstein, senior managing director, Currency)
  "Last year's fall of the U.S. dollar and the atypically high correlation of currency and equity markets will continue to be themes in 2010. There are two markers to look for in 2010 as they relate to currency. The first is how China will respond to increasing demands for a floating currency. Accommodation and dialogue will result in relative stability while a more combative posture will lead to widely fluctuating currency markets. The second marker is the likelihood of a change in interest rate policy in the U.S. If the Federal Reserve begins raising interest rates because growth has returned, the dollar will rally. However, the dollar will fall if rates rise because the U.S. needs to pay a higher return on its debt in order to attract investors. The outcome of this tension should provide for another interesting year, filled with opportunity in the currency markets."

• Real Estate (forecast by Joshua K. Daitch, senior managing director, Institutional Real Estate, Multi-Manager)
  "Although the market is showing some early signs of improvement from a transaction standpoint, we still see weak fundamentals. Demand is still soft and rents will continue to fall and vacancies continue to rise in 2010. While global central banks have injected the financial system with massive quantitative easing, this will not heal sick real estate deals. The only remedy is rapid recovery or restructuring and default. We expect to see more of the latter before we see the former. However, this presents great opportunities for new buyers."

• Chicago Real Estate (forecast by Richard A. Stein, senior managing director, Real Estate)
  "No storm lasts forever. As distressed assets continue to need recapitalization in the future, opportunities appear to acquire good cash-flowing assets well below their intrinsic values. The velocity of recovery is uncertain and will be bumpy, but as the long-term economic outlook for the Chicago economy remains strong, long-term real estate values remain solid. Smart discounted asset buys today will be rewarded in the future."

• Investment Advisory (forecast by Lee M. Gordon, senior managing director, Investment Advisory)
  "For retirement plan sponsors, plan fiduciaries face unprecedented liability and require more objective assistance than ever before because of current law and possible reform. Specifically, fiduciaries need help selecting the appropriate investments, understanding and comparing fees, evaluating plan vendors and creating innovative ways to help their employees reach financial security. Despite the ebbs and flows of the economy and market, we believe certain investment principles remain true. Most notably, investors should focus on their family's financial needs now and during retirement, establish goals that seek to achieve long-term compounding of returns and try to avoid the daily 'noise' of actionable trading ideas."

Extended narratives in the areas mentioned above as well as forecasts prepared by Mesirow Financial's other experts in investment strategies, institutional sales and trading, broker/dealer and investment advisor services, insurance services, investment banking, sale-leaseback capital, public finance, consulting and compensation and executive benefit strategies, are available. Diane Swonk's complete forecast for 2010 is available in the December edition of her newsletter.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with more than $36 billion in assets under management and 1,200 employees in locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For the fiscal year ended March 31, 2009, the firm posted $467 million in revenue, with more than $250 million in capital. For more information about Mesirow Financial, visit its Web site at mesirowfinancial.com.

For more information, contact: Julie Liedtke, Mesirow Financial, 312.595.7902.

 

The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc., © 2009, Mesirow Financial Holdings, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s).

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