Ignore the word "Boom" in 2007. Investors are unlikely to witness real estate revivals,
commodity surges or any kind of economic exuberance, irrational or otherwise,
according to Moody’s Economy.com chief economist and cofounder Mark Zandi.
However, Zandi says he does not expect "the downturn will unravel into a
crash."
 The economic tea leaves for 2007 reveal nothing if not mixed
investment portents. Profits appear healthy, hence the Dow’s upward trajectory
in the third and fourth quarters of 2006. Gross domestic product forecasts from
many of the economists we interviewed, however, project growth of less than 3
percent, the result of the Federal Reserve’s rate increases. Liz Ann Sonders,
chief investment strategist at Charles Schwab in New York, estimates the risk of
recession in 2007 is now 50 percent, based on the slowing housing market, oil
prices and the inverted yield curve.
Many economists see real estate as the strongest portent of a
recession (although others believe it is simply an inevitable correction). In
2007, Zandi expects property values to continue to fall, hitting bottom this
coming summer.
Some sectors will run counter to the slow-growth norm.
Investment advisors such as Sonders suggest looking to defensive positions in
publicly traded health care companies; this market benefits from an otherwise
flat economy because demand is nondiscretionary. In technology, some large-cap
public companies may remain attractively valued, and could benefit when
corporations unleash pent-up demand even as the economy slows, according to Mike
Williams, global strategist at Tocqueville Asset Management in New York. In real
estate, investors might consider growth markets overseas, such as India, China,
the UK and Germany. Advisors are recommending REITs that provide exposure to
international real estate markets (see "Building Your Global Real Estate Portfolio"). Investors can now find REIT-like structures in
Japan, Hong Kong, Singapore and France. Investors should be able to tap British
and German markets this year as well.
When GDP growth reverts to the mean, hybrid strategies may work
well for many investors. Kathleen Gaffney, co-manager of the $7 billion Loomis
Sayles bond fund in Boston, believes a great deal of credit for her fund’s 13
percent average annualized return over the past five years (through October
2006) goes to her use of fixed-income instruments. Gaffney sees opportunity
ahead in BBB corporate debt purchased along with its company stock. To maximize
this play, "look for industries that have suffered from bad news, but where
there’s no disaster coming," she says. The homebuilding market represents one
conspicuous example. The idea is that you boost income while adding a greater
potential for capital gains, assuming the company will improve its credit rating
and, in tandem, its share price.
Photo Illustrations by C. J. Burton.
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