Unprecedented Year Brings Challenges, Opportunity
Mesirow Financial Outlook Event Presents Perspectives for Survival
CHICAGO, December 4, 2008 — Although the current recession isn't expected to end any time soon, opportunities may exist for many sectors within the marketplace, according to experts speaking at Mesirow Financial's Fifth Annual Investment Outlook event today. The event, held at the Chicago Marriott Downtown, and titled, "A Shining Light in a Financial Storm: Perspectives and Insight to Help You Find Your Way in 2009," was attended by approximately 650 clients and colleagues. Recounting the economic and financial events of 2008, the speakers also noted ways in which patience and preparation today can bring about future opportunities. As Warren Buffett stated, if you wait for the robins, Spring will be over.
- The Economy (forecast by Diane Swonk, chief economist, Mesirow Financial)
"Last year I said that if we were calm and swam with the current, that the U.S. economy would be metaphorically 'battered...but not defeated in 2008.' Instead, the turmoil that we faced was far more severe than anticipated, and our collective panic compounded the problem. With weak consumer spending, an unimaginable credit seizure and business investment contraction, to name a few, the economy is expected to remain in recession at the start of 2009 and struggle to emerge later in the year. However, things will get better. We should see a positive GDP by the second half of 2009. There has also been a seismic change in policy over the last two months and the Fed, Treasury and Congress are all focused on the same economic target. Additionally, we have reopened dialog and moved in coordination with policymakers abroad. If we remain united, we will see that we are stronger as a whole than we are as the sum of our parts." - U.S. Equity (forecast by Michael Crowe, senior managing director, U.S. Equity)
"Just as it took far more than 13 months to get into this precarious position, it will take us a long time to work our way out of it. The financial system must repair itself; good banks must acquire bad banks. Fiscal and monetary policy must be brought to bear on the multitude of problems we are facing. In 2009, we anticipate the total return for the S&P 500 may be 12%. Given the unprecedented scope of the problems, we will have to work together globally to fix them. We must restore trust and confidence to the capital markets. America is for sale, we need to find some buyers." - International Equity (forecast by Leila Heckman, Ph.D., senior managing director, International Equity)
"The extreme panic and sell-off in the U.S. equity market has occurred to an even larger extent in many of the markets outside the U.S., especially when measured in U.S. dollars. Many markets, both developed and emerging, have valuations today which look very attractive on trailing price-to-earnings. However, emerging market growth has been dependent on exports and on commodity boom. Their ability to continue to grow will depend both on how deep the slowdown will be in the developed markets and on their ability to create domestic demand. If actions by central banks around the world prove to be successful in early 2009, the global markets could turn around within the year. If the recession sees a longer and deeper path, it is possible that very few of the global markets will rise in 2009. In the short term, we do not know when the global economy will return to a normal path of growth. We are closer to the trough than the peak of the market. Historically, the global equity markets returned 130% from trough to peak five years out. We believe you should be fully allocated to your international allocations." - Fixed Income (forecast by Steven Luetger, senior managing director, Fixed Income)
"Deflation may be unavoidable in the short run. In the long run, however, higher inflation seems inevitable as governments at home and abroad attempt to shore up confidence with guarantees on more and more assets. As a result, we expect the yield curve to remain steep. Bank loans may represent the cheapest segment of the market, as many are trading at historical recovery rates. These, and investment grade bonds, provide typically better risk-adjusted returns than high-yield bonds. We expect the bond market to go up .5% – 1% in 2009, which will be a good year to buy TIPS." - Private Equity (forecast by Marc Sacks, senior managing director, Private Equity)
"We expect very modest liquidity from private equity investments during 2009. Volatility in the public equity market has effectively closed the IPO window, while the typical buyers of private companies are generally capital constrained and more risk averse to strategic business combinations. Ideal Private Equity portfolio sub-class allocations may continue to include: 25-30% venture capital (with emphasis on early stage information technology), 35-45% leveraged buyouts, 15-20% special situations and 15-25% international private equity. Return expectations remain unchanged from 2008: Overall, top-quartile performing private equity funds could generate a 400-to 600-basis point annual premium going forward over long run median returns for public equities. If history is a guide, the private equity launched during this recession should outperform as they did in 1991-1993 and 2001-2003." - Hedge Funds (forecast by Stephen Vogt, Ph.D., senior managing director, Advanced Strategies)
"This past year will easily go down on record as the worst year ever for many asset classes and active strategies, hedge funds notwithstanding. We believe the right strategy for 2009 is one that is conservatively positioned with a neutral allocation between long and short ideas across all strategies. Certain dislocations, especially those providing for sustainable asymmetric returns (i.e., significant upside with limited downside on an un-levered basis) and those that are self-liquidating in nature, potentially offer the most noteworthy opportunities for attractive performance in the first half of 2009. Additionally, conservatively oriented trading strategies may do well as equity market volatility is likely to continue." - Currency (forecast by Gary Klopfenstein, senior managing director, Currency)
"Looking forward to 2009, there are two important factors to consider. First, one of the primary forces driving the currency markets will be the ability, or lack thereof, of European policy makers to act in a coordinated fashion. Regardless of what you think of the U.S. government's rescue plans, at least we have one voice, as opposed to many conflicting agendas in the European Union. This should bode well for the U.S. dollar as a place of relative safety. Second, there may be a tipping point regarding the perception of governments' ability to pay for the various rescue and stimulus packages. If the market participants perceive significant risks here, there will be spikes in short-term interest rates and further large moves in global currencies. However, one thing seems certain — volatility in currencies is here for the foreseeable future and effective currency management has become a necessity. In 2009, we anticipate the Euro to weaken further, near 1.15, and then rebound during the year to near 1.35. The Japanese yen is expected to end the year near 100." - National and International Real Estate (forecast by Joshua Daitch, senior managing director, Institutional Real Estate, Multi-Manager Strategies)
"The severe shift in the demand curve will result in higher vacancies and lower rents this year. Major money center cities dependent on financial services — such as London, New York and Tokyo — may see the biggest decline as the sector wallows. The bright side of this cycle is that new development has effectively halted. The cocktail of weaker demand combined with high construction costs and the lack of financing is going to put new construction in a state of suspended animation, which foretells a period of very low vacancy and rapidly rising rents when coming out of this cycle. The commercial real estate market is in for a tough year. We fully expect significant mark-downs in the fourth quarter from underlying funds comprising the NCREIF index, and project a significantly negative 2009 of between -10% and -15% as these mark-downs continue to filter through the marketplace. However, we prefer to focus on the opportunity. Cash has never been more valuable and buyers will be able to acquire real estate at half-off sales — maybe more. For those that have the staying power to make it through this cycle, we see buying opportunities coming that have been unprecedented in a generation." - Chicago Real Estate (forecast by Richard Stein, senior managing director, Real Estate)
"The current lack of activity in residential real estate in this difficult economy is unprecedented. In 2009, we believe almost all developers will abort or defer new projects, which will limit additions to the condo supply. Although developers will face challenges such as weak buyer psychology, pullback by investors, no funding by lenders, difficulty in obtaining mortgages, falling prices, and appraisals being hard to come by, when the resurgence of capital markets takes place and the job market recovers, residential real estate will rebound and buyers will wish they had purchased when new construction options were numerous and the pricing was attractive. Chicago's Central Business District should continue to fair better than most cities because it is so well diversified. High quality, well located office buildings should be saleable when the capital markets return while suburban markets may take longer to recover from the economic downturn. Whether it is the highly skilled labor force, strategic location in the Midwest with great transportation, economic incentives, or a combination of all three, some new tenants continue to move into the Chicago market." - Investment Advisory (forecast by Julie Vander Weele, senior managing director, Investment Advisory)
"In light of this uncertainty, rather than recommending changes to our clients' portfolios, we are reminding our clients of their investment plan, and when appropriate, reassessing risk tolerance. Investors should confirm that their stated risk tolerance is still compatible with their comfort level, and if circumstances have changed, portfolio adjustments should be made. We also believe now is an appropriate time for every investor to review their liquidity needs for the upcoming year and determine the appropriate level of cash in their portfolios. Investors should also evaluate taking tax losses if appropriate for their situation."
Video and audio of the event, as well as extended narratives in the areas mentioned above and forecasts prepared by Mesirow Financial's other experts in investment strategies, institutional sales and trading, broker/dealer and investment advisor services, investment banking, sale-leaseback capital, public finance, consulting and compensation strategies will be available on the Mesirow Financial web site. Diane Swonk's complete forecast for 2009 will be available later this month in the December edition of her newsletter.
Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent, employee-owned firm with nearly $30 billion in assets under management and more than 1,100 employees in 30 locations across the country and in London. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals and was named one of Chicago's Best Places to Work by Crain's Chicago Business in 2008. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.
For more information, contact: Julie Liedtke, Mesirow Financial, 312.595.7902.
The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc., © 2009, Mesirow Financial Holdings, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s).
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