OCEAN CITY – As the global economy struggles to return to more normal growth in the coming year, investors can expect two economic trends to emerge: consolidation and protectionism, says Banc of America Securities-Merrill Lynch (BAS-ML) Research Chief Investment Strategist Richard Bernstein.
Consolidation, the reduction of capacity because of excessive inventory, is the natural flip side of the credit bubble’s overbuilt balance sheets and inflated demand. During 2009, credit-related problems may develop in sectors such as industrials, energy, materials and technology, and consolidation might be required to return companies in these sectors to profitability. Bernstein also counsels investors to be on the lookout for trade protectionism as a political response to rising unemployment and other consequences of consolidation.
Based on these trends, the BAS-ML Research Investment Committee has identified four themes for investors to consider: Well-capitalized, very high-quality emerging market banks; defense stocks; consumer staples (companies that produce the things people use every day); and smaller cap U.S. stocks as a substitute for non-U.S. equities.
First, we suggest that consolidation may be a key investment theme because bubbles tend to build overcapacity in an economy. In the US, that has meant tremendous overcapacity to lend, whereas in China it is dramatic overcapacity in manufacturing. These are just two examples that severe overcapacity is becoming an increasingly common problem in a spreading number of economies, and such overcapacity cries out for a rationalization or shrinkage of that capacity before companies can return to profitability.
A natural political response to such consolidation pressures is protectionism, which is already gaining momentum in parts of the world both in terms of good and services and in terms of the inputs to production like capital. As an example of the latter point regarding restricting capital flows, we doubt that the new Congress will take well to bailed-out US banks lending to foreign countries while not lending in the US.
We encourage you to read our full report on our website and to discuss with your financial advisor the appropriateness of these themes within the context of your existing portfolio.
Throughout history, globalization has acted like an accordion. It expands and it contracts, and right now we feel that globalization is in the contraction phase. However, we continue to believe that there are plenty of interesting investing ideas for contrarian-minded investors.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)