CHICAGO, December 15, 2011 – Mesirow Financial’s business leaders identified opportunities and challenges in 2012 at its eighth annual Investment Outlook event this morning. The event, titled "Finding a Balance: Insight to Help You Understand Today's Markets and Identify Opportunities in 2012," was held at the Sheraton Towers and attended by nearly 500 clients and colleagues.
Chairman and CEO Richard Price moderated the event, and welcomed the audience by noting, "We work closely with our clients throughout the year, and this event provides the unique opportunity to share our leaders' insights across many disciplines." The perspectives provided by the firm's business leaders – noting 2011 as a bifurcated year starting strong and ending weak in many sectors – provided insight on how to strike a balance in 2012:
U.S. Economy (forecast by Diane Swonk, chief economist, Mesirow Financial)
"The economy is recouping lost ground and appears to be regaining some momentum, particularly in the private sector. The last few years have taught us, however, that the U.S. is not an unsinkable vessel and can quickly lose steam. This is to say nothing of the obstacles that we still must overcome to get us out of such treacherous waters.
Looking forward to 2012, the recovery is expected to reaccelerate after nearly stalling in 2011. Gains, however, will remain extremely uneven. Consumer spending should continue to recover, but more slowly than the overall economy. Employment is expected to pick up and the payroll tax cut is expected to be extended, which should keep income growth in the black. However, a further increase in healthcare costs, stagnant wages and an end to extensions for unemployment insurance will dampen those gains.
Business investment is expected to remain strong and continue to grow faster than the overall economy. Exports are expected to outpace imports so the trade deficit is expected to continue to narrow. After-tax, corporate profits are expected to rise almost 4% from a year ago, slower than in 2011, but still a good year. Revenues are expected to pick up slightly with stronger demand, but profit margins are expected to be squeezed a bit.
The crisis in Europe is still expected to get worse before it gets better, especially in the banking sector. At home, the Fed is expected to remain extremely accommodative in 2012 and will not hesitate to use more unconventional policies to both boost growth and stabilize financial markets if necessary."
International Economy (forecast by Adolfo Laurenti, deputy chief economist, Mesirow Financial)
"Because of the tight financial linkages in the globalized financial markets, especially money and short-term liquidity markets, the United States happens to be exposed to the multiple challenges posed by the European situation. The challenges that the members of the European Union (EU) face are twofold. First of all, there is a complex mix of sovereign debt levels that has become unsustainable for some of the member countries (e.g., Greece) and hardly manageable for others (e.g., Italy and Spain). On the other hand, the heightened risks and declining values of sovereign debt have resulted in a major hit on the European banking and financial system, which in turn has caused massive undercapitalization of the banks, particularly in France and Germany.
Going forward, we see increasing potential of a recession in Europe, a downturn that will fully play out in the first half of 2012. We also expect the political will of Europeans to defend the euro to prevail over calls for a breakdown of the common currency; nevertheless, the slow-paced decision process within the EU and the euro area will continue to project a sense of weakness and a lack of leadership, which will translate into persistent volatility in the financial markets and contribute to heightened tensions in the sovereign debt markets. The European crisis is also posing challenges to the rest of the world; we continue to see growth in China, Brazil and the other emerging economies, but it remains to be seen at what pace they can grow if U.S. growth is moderate and if Europe stalls."
U.S. Value Equity (forecast by Susan Schmidt, managing director, U.S. Value Equity)
"In 2011, large-cap indexes outperformed small cap, and growth stocks outperformed their value counterparts. This performance is disappointing in light of increased hopes this past spring that the Fed's quantitative easing initiative would boost the economy. In the first half of the year, the market was able to look past the dislocation among industrial and technology companies caused by the earthquake/tsunami in Japan. However, by the second half, compounded concerns about the Arab Spring, political gridlock in the U.S. and the unfolding sovereign debt crisis in Europe overwhelmed market confidence, despite positive earnings reports.
Companies that we expect to appreciate in value in 2012 are those that defend and grow their business positions and are able to deploy cash to take advantage of strategic opportunities for the benefit of shareholders. Additionally, we anticipate the continuation of secular trends, such as rising private-label consumption in the grocery aisle, a large and growing unbanked customer with a need for alternative financing services, rising new car sales necessitated by an aging fleet, the North America oil and gas shale renaissance that offers long-term potential for energy independence, and rising farm incomes helped by high crop prices and multi-decade low inventories."
Fixed Income (forecast by Steven Luetger, senior managing director, Fixed Income)
"Last year, we were asked 'why own Treasuries?' The answer is simple: When investors become afraid, they flock to U.S. Government debt. Treasuries represented the single highest performing traditional sector by far over the past 12 months, gaining more than 7%, as of November 21, 2011. In comparison, stocks, as measured by the total return of the S&P 500, gained just 3% during the same time frame. Even at current low interest rates, domestic and international crises have created excessive and irrational demand for U.S. government debt.
For 2012, we expect higher Treasury rates to be offset by spread compression in non-Treasury sectors. For that reason, we favor high-quality and high-yield corporate bonds over Treasuries for our clients. Specifically, we would overweight U.S.-centric bank debt, as materially strengthened capital and liquidity accounts have improved the bondholder’s position relative to that of the stockholder. Overall, we expect 2012 returns from the investment grade bond market to be in the range of 2%-2.5%.”
Private Equity (forecast by Marc Sacks, senior managing director, Private Equity)
"Private equity investment soared during the first half of 2011 as the robust high-yield and leveraged loan markets fueled LBO activity. Investment pace markedly slowed in the second half following a correction in public equity values and tightening of credit markets. Similarly, the IPO window was open to high quality, private equity-backed companies during the first half of 2011, but market volatility during the second half forced many promising IPO candidates to put their offering plans on hold.
Our recommended private equity sub-asset class allocations continue to include: 20-30% venture capital and growth equity, 35-45% U.S. leveraged buyouts, 15-20% special situations and 20-25% international private equity. We recommend an opportunistic approach to the secondary market given the increasingly competitive pricing applied to these assets."
Hedge Funds (forecast by Thomas Macina, senior managing director, Advanced Strategies)
"2011 saw the second consecutive middling year for hedge funds with few risk asset categories offering compelling returns. Moving into 2012, we believe the right portfolio positioning is to shrink overall risk exposure and maintain higher levels of cash, but to take calculated risks – in non-agency RMBS and value equities in particular – within a reduced-risk budget. This positioning should allow hedge fund investors to withstand further turbulence, avoid having to aggressively de-risk and potentially be in a position to deploy dry powder should risk assets sell-off dramatically."
Currency and Commodities (forecast by Gary Klopfenstein, senior managing director, Currency and Commodities)
"Market perception was the key driver of volatility in both the Currency and Commodities markets during 2011. Early in the year, this worked in favor of the euro and emerging market currencies as the euro rallied to its high of close to $1.50 in early May, but resulted in a stronger U.S. dollar during the final third of the year as the debt crisis in Europe created doubts about the stability and sustainability of the European Union. Commodities followed a similar path, as the global growth scenario that was anticipated at the beginning of the year, gave way to broader fears of a slowdown, resulting in weaker commodity prices through the summer.
Looking ahead to 2012, we strongly believe some of the same themes will assert themselves. As both the world and investment portfolios have become more globally connected, it is our view that the impact of currency on investments – as either a risk factor or potential opportunity for added value – has never been as important."
International and National Real Estate (forecast by Joshua Daitch, senior managing director, Institutional Real Estate, Multi-Manager)
"The first half of the year showed signs of promise in the real estate sector, with marked improvement in investment sales up globally at 30%, as well as underlying property fundamentals that showed signs of strengthening. However, the second half of the year has seen the sector weakened by the global economic contagion, resulting in a significant pullback of capital and the reassessment of risk by investors. The one bright spot for real estate in the U.S. has been the multifamily sector, as the first three quarters of 2011 saw $36.2 billion of apartments sold, surpassing full-year 2010 totals and representing a 67% gain over the same period in 2010 in both dollar volume and number of properties. Current sale volumes have returned to 2004 levels, pre-condo boom and in pre-crisis 2008, with cap rates in the low to mid 6% range. The National Council of Real Estate Investment Fiduciaries (NCREIF) National Property Index is up 16.1% over the past four quarters following September 2010, and year-to-date is up 10.98%, reflecting some of the positive momentum felt earlier in the year.
In 2012, we anticipate the NCREIF index to be up 5-7%, driven mostly by income returns, and expect to see more opportunities in distressed debt in developed markets, with significant distress in Europe as liquidity gets sucked out of the market."
Diane Swonk's complete forecast for 2012 is available in the December edition of her newsletter. The complete forecasts for all of Mesirow Financial's businesses is also available.
Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with approximately 1,200 employees globally. The firm is well capitalized and has been consistently profitable, with capital of $302 million, revenues totaling $510 million for fiscal 2011 and $59.1 billion in assets under management, of which $31 billion are in currency and commodities as of September 30, 2011. With expertise in Investment Management, Global Markets, Insurance Services and Consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit mesirowfinancial.com.
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