U.S. economy isn’t as strong as you think

These days, the U.S. is considered the star of the global economy, say experts.

But its recovery “isn’t as deep or broad as people may think,” says Ronald Temple, portfolio manager and director of U.S. research at Lazard Asset Management. He led the first session at the 2014 PMAC conference in Toronto today.

While household net worth across the U.S. has risen 20% since the recession, he notes, statistics can be deceiving. For example, homeowners have recovered US$4.7 trillion of lost equity since 2008 and 2009, but most of that has come from rising property values that may not be sustainable.

Read: Is U.S. housing slowing?

Further, while the U.S. private sector has deleveraged significantly, the public sector debt has continued to increase—led primarily by mortgage, school and auto loan debts.

Overall, says Temple, middle-class net worth across America has plunged 25%, compared to 2007 levels. And median real household income, which is sitting below US$52,000, has dipped below the median recorded in 1989.

The U.S. is benefitting from employment growth, a strong finance sector and controlled inflation expectations, he says, but he adds he doesn’t expect its GDP growth to exceed 2% this year.

Read: Op-Ed: Volatility’s antidote is U.S. economic growth

Still, investors can take advantage of equity opportunities. Temple advises they focus on undervalued securities outside of Canada, given there are too few, and also emerging markets.

Read:

• How to uncover emerging markets assets
• Tap U.S. economic growth

He predicts returns will fall in the 4% to 6% range over the next year. For more on his view of global markets, check out assistant editor Katie Keir’s conference live tweets below* .

Following the presentation, an expert panel discussed how the investment industry will change over the next five years, and which foreign investments are gaining popularity. That panel included: Trevor Hunt, vice-president at BNY Mellon Wealth Management; John Siciliano, managing director at PwC Advisory; Carolyn Tsen, pension fund senior advisor at Hydro One; and Marcus Turner, senior investment consultant at Towers Watson.

Siciliano kicked off the discussion by citing a 2014 PwC report, called Asset Management 2020: A brave new world, which states, “The future is bright. Few people in the asset management industry would have shared this sentiment in 2008 or 2009, [and] not many believed it even as asset prices recovered [between] 2010 and 2012.

Read: Global AUM to exceed $100 trillion by 2020

“However, changing markets and investor needs will combine to produce a positive environment and huge [investment] opportunities for asset managers through 2020.”

But, it adds, “There are also clouds looming […] Alongside rising assets, there will be rising costs […] and margins in 2020 may be no higher—and may well be lower—than in the current post-financial crisis era. Profits today are still 15% to 20% below pre-crisis highs,” and they may not return to previous highs.

The report also predicts alternatives and foreign investment will become more mainstream by 2020. And that’s a viewpoint the panel agreed with: all four experts note that most institutional and wealthy investors are increasingly turning to infrastructure and real assets to boost portfolios over the long term.

Read:

• Alternatives a solution to high correlations
• How alternatives boost portfolios

As a result, active management is growing in popularity, especially when it comes to emerging markets. Temple finds these regions often deal with headwinds and tailwinds simultaneously, so they’re more volatile.

For more tips from the panel, view the live tweets below. Read more from Katie Keir and Follow @katiekeir.

Live tweets from PMAC conference (* Return to rest of article)

Mortgage, school and auto debt are all contributing to the escalation of debt in the U.S., says Ronald Temple at ‪@PMACnews conference.

Also, the U.S. is 11 million jobs away from pre-crisis employment levels. That’s partially because of aging workforce: Temple ‪@PMACnews ‪@advisorca

So, he forecasts the U.S. will grow by 2% this year. Its recovery is good, but “not as deep or broad as people may think” ‪@PMACnews ‪@advisorca

Temple says interest rates won’t rise until at least 2016. So 10-year treasury rates will remain low ‪@PMACnews ‪@advisorca

When China slows down, and it likely will, investors will have to monitor commodity prices: Temple ‪@PMACnews ‪@advisorca

Chinese growth will remain lower than forecasts by analysts, says Temple, due to aging workforce, rising land values & accumulating leverage ‪@PMACnews

Europe’s story is no better, says Temple. In the next 3 to 5 years, he forecasts growth of 50bps to 100bps ‪@PMACnews ‪@advisorca

If there’s one place to seek active management, it’s EMs. They struggle with headwind and tailwinds simultaneously ‪@PMACnews ‪@advisorca

Read: A closer look at emerging markets

Income strategies are best employed globally. If you use them primarily in the U.S., you get exposure to many companies, such as those in utilities, that are overvalued, says Temple ‪@PMACnews ‪@advisorca

Temple: “We’re navigating uncharted economic and monetary policy [environments]. This makes historical data less reliable.” ‪@PMACnews

Regarding which foreign assets will become mainstream by 2020, Siciliano says infrastructure will rise in popularity ‪@PMACnews ‪@advisorca

As well, more people will invest in timberlands and cell towers, and in rights to land and mineral assets ‪@PMACnews ‪@advisorca

Read: Build concrete portfolios

Market-weighted indices put people at risk of overexposure to sluggish sectors, says Hunt. So active investing in alternatives is more popular ‪@PMACnews ‪@advisorca

Siciliano agrees, adding, “We just happen to be in a period where passive investing has outperformed active.” ‪@PMACnews ‪@advisorca

Turner says 15% of his clients have moved out of Canadian equities, and the majority have made at least some portfolio adjustments ‪@PMACnews ‪@advisorca

When shifting out of or into bonds, companies and funds have to research rate forecasts and consider how diversified their portfolios are, says Turner ‪@PMACnews

Read: Don’t overlook global bonds

If they’re adding exposure to bonds because interest rates may go up, and/or because rates aren’t likely to go down any further, companies should consider tapping global and corporate bonds ‪@PMACnews