U.S. entitlements and CEO confidence top concerns: BMO expert

CEO confidence is lagging in the United States, a worrisome trend as the mood in the corner offices of America’s big firms has historically been a very good predictor of employment growth, Jack Ablin, executive vice president and chief investment officer at Harris Private Bank in Chicago, said at BMO Global Asset Management’s Insights into Income event in Toronto.

Ablin suggested a recent meeting of top CEOs with President Obama didn’t appear to do much to boost their confidence. If left unchecked, Ablin warns, this trend “is essentially going to lead to flatlining jobs numbers. We need improvement [in CEO confidence] soon because hiring depends on it.”

Another thing that depends on CEO confidence is capital investment, and “right now it’s flat,” Ablin says.

Capital spending is directed towards two main objectives, he explains. One is expanding capacity, the other is enhancing efficiency. “Chances are there aren’t too many rationales, at least in the United States, for expanding capacity, except for unique industries. That leaves spending to improve efficiency. But what does that mean? It’s not a recipe for hiring more people,” Ablin explains.

Fiscal woes

Ablin does not mince words when it comes to nailing down the solution to the United States’ astronomical government debt. The only way, he says, is to take the axe to out-of-control entitlement spending.

“Unfortunately most government spending has shifted away from what we would call investments – in infrastructure, education and defense – and migrated back to entitlements, which are essentially cheques to individuals,” he says.

Cheques to individuals account for 15% of GDP. Total taxes collected account for about the same percentage of GDP. “So the U.S. government is taking 100% of its tax collections right now and redistributing them to other individuals,” Ablin notes.

Read: U.S. fiscal fight heats up

Ablin says all the bickering and political posturing in Washington over the fiscal cliff will come to nothing in the long term unless politicians are willing to put the crosshairs on entitlements, particularly Medicare and Social Security. “Medicare has to be tackled and right now I’m not hearing anything in Washington that’s covering this,” he said, adding that policymakers “are putting off the inevitable…especially because we have a massive number of retirees hitting the Medicare age every day, and medical costs are rising at double the rate of our economy.”

Investment outlook

Ablin says he’s anticipating returns in the mid-single digits next year for the S&P 500, and suggests equities, or equity-like securities that derive their value from the equity market, are a better source of income than fixed income bonds.

Read: Which equities suit boomers?

With respect to growth versus value investing, Ablin says “we are still are invested in growth, but it looks like value is starting to overtake growth, and growth has gotten expensive relative to value. So with value you have a combination of a relatively inexpensive style that’s starting to move ahead. My sense is we are likely going to shift away from growth and into value relatively soon. But we’re not there yet.”

He also says he likes emerging markets, which are trading at a roughly 20% discount to the U.S. and have higher economic growth prospects.

As for commodities, Ablin expects “the next 10 years will likely be disappointing for those who are looking at history as a guide.”