Investment choices seen tougher in 2010: Analysts

Without a meaningful pick-up in bank lending, businesses will be hard-pressed to grow at rates typical of a post-recession environment, analysts said.

“The concern we have is whether or not people have money to spend, or money to borrow,” said Max Darnell, chief investment officer of investment firm First Quadrant.

Without improved access to credit, a double-dip recession is possible, said Darnell, whose fund manages nearly $18 billion.

Growth in real gross domestic product in 2010 will likely be 3 percent or slightly higher, because the “velocity” of money, or bank lending, remains low, Bob Doll, vice chairman and chief investment officer of global equities at BlackRock Inc, the world’s largest investment firm, said.

Growth of 5 percent or slightly higher is more typical coming off a recession low.

Also clouding the investment climate, lingering high unemployment and sluggish wage growth are likely to keep a chill on consumer spending, which traditionally is the engine for U.S. growth.

As the U.S. equity market enters a phase driven by fundamental earnings growth, Doll said potential deflation trumps other worries.

“We’re past the point where the market goes up faster than earnings. ... The earnings phase is bumpier, and growth isn’t quite as good,” he said.

Doll said the broad-based S&P 500 index could reach 1,200 to 1,300 points in 2010, against Tuesday’s close of 1,091 points, helped by companies’ continued efforts to contain costs.

The S&P 500 index is up about 64 percent from lows hit in March during the height of the recession and financial panic, as risk aversion has receded.

“We do see a significant amount of upside, but that’s without a whole lot of top-line growth. Corporate America has shown through productivity and cost-cutting an amazing operating-leverage capability,” Doll said.

The U.S. economy expanded at a 2.8 percent annual rate in the third quarter, snapping four straight quarters of decline.

But even after the unemployment rate declined unexpectedly in November and job losses were much smaller than expected, there are concerns that the economy faces a bumpy road.

Shawn Kravetz, president of Boston hedge fund Esplanade Capital LLC, said the economy is not on a glide path higher given continued constraints on consumer spending.

“The consumer has had a stay of execution but there’s still a lot of hard labor yet to come,” he said.

Fed on hold for now

Most strategists agreed that with unemployment high and inflation low, the Federal Reserve would not raise interest rates from current rock-bottom levels, at least for the first half of 2010.

Financial markets brought forward the likely timing of a first Fed move after Friday’s dramatic November payrolls report, to the third quarter of 2010.

But Kenneth Volpert, head of the taxable bond group at giant fund manager Vanguard Group, said the Fed could be on hold for all of 2010.

“We see fairly weak real final demand, which we think is going to lead to a jobless recovery for a prolonged period,” he said, adding that real jobs growth could be five years in the making.

Doll said that although the U.S. was the best pick for investors among the developed world, the higher savings rate and the absence of the “debt noose” made emerging markets a more favorable investment story for now.

“Thank goodness we’ve got the developing world. Because otherwise, Planet Earth wouldn’t be growing much at all,” he said.