09.16.2011
By Terry Flanagan

Recessions: The New Normal

Investors should be prepared for next-to-nothing bond yields, as recessions are imminent, said investment manager.

Companies may be one of the few beacons of light for U.S. investors as they paint a positive picture of growth and healthy earnings.  Despite fundamental improvements in the economy, a top-down look at the global and domestic macroeconomic scene is gaunt.

“We need to get used to this; recessions will become more frequent,” said Ruchir Sharma, managing director at Morgan Stanley Investment Management. Sharma forewarns that recessions are the “new normal”, but also, that the U.S. was subjected to many recessions prior to 1982—a third of U.S. history prior to 1982 was spent in recessions.

Investors today are more alarmed by the market slump because of atypical long economic expansions in the 1980s, according to Sharma. During such times, the U.S. mistook good economic fortune to rack up debt.

“We’ve accumulated a lot of debt,” Sharma noted. “The biggest mistake people make is that they look at valuation metrics from 1982. This is a new world, to which we are adjusting.”

Today’s slow economic growth also spells hardship for the U.S. bond markets.

“The bonds markets are in somewhat disarray,” said Gene Needles, chief executive of American Beacon Advisors.

“You get two percent for locking up your money with U.S. treasuries, and you’re not sure if anyone will repay you—including the U.S. treasury. And, you’re not sure what the buying power of that is because of the liquidity we flooded into the system.”

American Beacon Advisors has 50 billion under management, but is wading through the tough market via “diversification and discretion”—an idea that supports flexibility for managers.

“The dispersion of returns amongst managers have widened, given these markets,” said Needles, who championed that American Beacon’s “multi-manger approach,” is a unique, and different way to effectively navigate today’s markets.

The firm has over north of 50 billion under management, and utilizes sub-advisors for its Large Cap Value, Mid-Cap Value and Small Cap Value Funds.

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