Putnam Officials Optimistic about U.S. Economy

In the context of the negative market tone of the second half of 2011, the U.S. economy saw positive surprises around July, a pattern that Putnam predicts could continue in 2012.

“I’m actually fairly optimistic on 2012,” said Jeffrey Knight, head of global asset allocation at Putnam, adding that the U.S. is “pretty resilient.”

Putnam officials outlined the biggest investment themes they predict for 2012:

•  Opportunity lies in the middle. In 2012, opportunity may lie between the ultra-safe assets that outperformed in 2011 and the crisis-sensitive investments that fell sharply. “It’s the investments in the middle that I think are most attractive,” Knight said. Putnam cites high-yield bonds and U.S. large-cap stocks. Even as credit fundamentals improved in 2011, high-yield spreads widened. As 2012 begins, these spreads are above 7%, a significant premium over Treasuries that yield about 2%. Regarding large-cap stocks, Putnam said that the U.S. economy could surprise on the upside in 2012, and U.S. stocks are likely to appear very attractive globally.

• Growth rate of non-deleveraging sectors will continue. Putnam said that while the U.S. economy has been facing a headwind from deleveraging in the past several years, it’s important to remember the deleveraging does not affect all sectors of the economy. Non-deleveraging sectors have been expanding at a brisk pace and consistently adding jobs. In addition, an equally weighted portfolio of stocks from non-deleveraging sectors made near the market peak of 2007 would have delivered positive returns through the end of 2011. Putnam officials said they see no reason why these trends should reverse in 2012.

• Geography will continue to be meaningful. In 2012, Putnam predicts Europe will continue to fight its debt crisis, while Asian countries like China will be ready to reaccelerate. Equity market performance could follow, with leadership returning to emerging markets and the U.S. as capital is withdrawn from Europe and placed in more attractive areas.

•  The U.S. economy should remain supportive. Housing, jobs, consumer confidence and spending have all improved, and corporate profitability as measured by margins is quite high. The U.S. economy should remain self-sustaining in the coming quarter.

•  Non-U.S. equity markets will continue to be affected by European risks. In the first quarter of 2012, Putnam expects non-U.S. equity markets to be affected by risks from Europe including heavy sovereign funding schedules and continued elevated borrowing costs for countries such as Portugal, Italy, Ireland, Greece and Spain. Putnam officials predict the European Union will likely have the political will to remain intact through this period of macroeconomic instability. Market observers may continue to worry about a European recession affecting recovery in the U.S. Putnam officials added that they do not believe Europe will derail long-term growth of emerging markets.

•  The fundamentals across a range of fixed-income sectors remain attractive. Defaults in corporate debt are far below the long-term average, and Putnam predicts the default rate will remain low, even in a relatively weak economy. In 2011, corporate earnings measured by the S&P 500 may hit an all-time high. Non-agency securities should generate attractive cash flows, even if housing prices continue to struggle. 

•  Concern remains with technicals, rather than fundamentals. The U.S. Federal Reserve and European banks have large exposure to non-agency RMBS. If the market supply increases dramatically as these entities sell their positions, it could undermine prices.

Putnam’s Capital Markets Outlook report is available at https://content.putnam.com/literature/pdf/CM0100.pdf.