Expect slow, steady growth: Scotia’s Kellett

The North American economy should experience moderate, sustainable growth with low inflation in the coming year, according to John W. Kellett, senior advisor, mutual fund business development at Scotia Asset Management.

The market veteran says the latest recession, while bad, fits into a historical pattern — there have been 32 periodic economic setbacks since the 1850s, with a recession every five years.

“I’ve been through 11 bear markets and they all feel bad; this was one of the worst,” he says. “This episode was so bad that the central bank rate in London, England is at its lowest rates ever — the Bank of England started setting rates in 1694.”

Inflation should not be a threat in the near term, Kellett says, and he is comforted by U.S. Federal Reserve chairman Ben Bernanke’s academic familiarity with The Great Depression.

While global monetary policy remains accommodative, fiscal austerity measures introduced to shore up sovereign debt ratings are already beginning to drag on growth. While the U.S. federal government has increased spending, state governments are cutting back. Both policies are problematic, as Washington’s debt spirals out of control and state job cuts blunt any benefits of federal spending.

After a short burst of economic recovery, U.S. consumer confidence is lagging and the overall mood has shifted from hopeful to angry. That anger is expected to play a major role in the mid-term elections being held on November 2, in which the Democrats are widely expected to lose control of the House and Senate.

In terms of market performance, Kellett says a unified government — where Congress and the White House are controlled by the same party — is not necessarily better than one that is grid-locked. A split government has meant a better return, at least since 1973.

As consumer confidence slowly gains traction, stocks do not necessarily follow suit and can sometimes have the opposite effect.

“It is not a lost cause by any stretch of the imagination,” he said, warning that consumer confidence is a poor bellwether for the stock market. But he added that “American banks are certainly on the road to recovery.”

Kellett cited mutual fund pioneer Sir John Templeton on bull markets: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” The markets are currently in the skeptical stage, according to Kellett, but are heading into the optimism phase.

With the boomer generation heading into retirement, there is a shift underway toward income oriented portfolios. He sees the risk of investors outliving their money as a real issue, with one in four people currently 65 years old expected to live to age 97.

Traditionally seniors would shift from equities into bonds to fund retirement, but Kellett doesn’t believe interest income is the safe bet that it used to be. He advocates dividend yielding stocks as a better method of funding retirement.

“I love dividends, my whole career has been predicated on dividends,” he says.

For growth, he looks to the emerging markets, where there is already a changing of the guard. In the coming decade, India will see 110 million people enter its workforce, which should allow the country to surpass China in leading international growth.

He also cites Indonesia as one of many countries that is enjoying moderate growth. Meanwhile China has taken steps to slow its economy, including the deliberate cooling of its real estate market.

(10/28/10)