The following are Sit Investment Associates’ monthly domestic and quarterly international outlook and strategy summaries. These summaries contain the collective opinions of our analysts and portfolio managers and are provided for informational purposes only. At the end of each calendar quarter, copies of the full domestic and international publications are available. While the information is accurate at the time of writing, such information is subject to change at any time without notice, and therefore, so may the investment decisions of Sit Investment Associates.

Domestic Outlook and Strategy

March 10, 2010

Domestic equity markets rebounded in February, recovering most of the decline that occurred in January. The S&P 500 Index gained +3.1 percent on a total return basis, while small and medium capitalization stocks performed even better. Bond market performance was respectable during the month, as the U.S. Treasury yield curve steepened slightly, with rates flat on the short end, falling 0-5 basis points for intermediate maturities, and rising 0-10 basis points on the long end. Corporates, asset-backeds and mortgage-backeds also delivered positive performance, and tax-exempt bonds were very strong.
Regarding the U.S. economy, the preliminary (second) estimate of fourth quarter 2009 real GDP growth was a slight revision upward to +5.9 percent from the previous estimate of +5.7 percent. Downward revisions to personal consumption expenditures and net exports were more than offset by upward adjustments to business capital spending and the change in business inventories, all of which netted to a $6.1 billion increase to real GDP.

The latest revisions to U.S. economic growth also supported our thesis that consumer spending will continue to grow at subpar rates, as consumers continue to pay down debt and increase their rate of savings. In fact, consumer spending growth in the fourth quarter was revised down to +1.7 percent from +2.0 percent in the latest figures, which was markedly slower than the +2.8 percent pace of the third quarter. In terms of a general pattern to future growth, we expect the change in business inventories to help GDP growth in the near term and business spending to help over the near to medium term horizon, as consumer spending begrudgingly recovers over the longer term.  This thesis also leads to our forecast for solid economic growth in the first half of 2010, followed by more tepid growth in the second half of the year, as government stimulus effects wane and the economy again will have to rely more heavily on internally driven consumer spending.  Our estimates for GDP growth remain unchanged. Our 2010 forecast for real GDP growth is +2.9 percent, close to the long-term average.

Supporting the consumer, nonfarm payrolls, released on March 5th, fell -36,000 in February, which was quite a bit better than the expectation of a loss of -63,000 jobs. Since the series of strong snow storms on the East Coast probably had a significantly negative impact on the payroll report, it seems likely that the economy would have added jobs during the month without the weather impact. The unemployment rate remained steady at 9.7 percent. We continue to expect slow, yet steady, improvement in labor markets as the year progresses. The momentum provided by the likely change to net job growth, along with the accompanying improved psychology, should strengthen consumer spending as this trend unfolds.

For a complete copy of the latest quarterly summary, click here: Domestic Outlook and Investment Strategy (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.

 

International Outlook and Strategy

January 13, 2010

We materially increased our global GDP forecast from +2.4 percent to +2.8 percent for 2010.  The first half of the year should be stronger for most nations as stimulus money will continue to have a positive impact; however, as we enter the second half we may witness slowing economic growth as a result of the stimulus withdrawal.  We anticipate that various monetary and fiscal measures will gradually be wound down, but it will be measured to reduce the negative impact on growth.  In the U.S., we increased the 2010 GDP estimate from +1.7 percent to +2.4 percent, largely for the aforementioned reasons.  In developed Europe, we modestly increased our 2010 GDP growth estimate to +1.5 percent from +1.0 percent as these economies will continue to expand because of export demand and consumption growth.  In emerging Europe, we anticipate significantly higher growth of at least +3.5 percent, driven by consumption, particularly in Poland and Russia.  Japan’s economy continues to lag other nations and we only anticipate growth of +0.5 percent in 2010.  Growth within Japan will be driven by exports while consumption will likely remain anemic.  In the rest of Asia, growth is rather robust.  We increased our Asia ex-Japan 2010 GDP growth estimate to +8.0 percent from +7.5 percent, primarily on higher growth from China, and to a lesser extent other emerging economies, such as India.  For 2010, we expect Chinese economic growth of at least +9.0 percent, as trade recovers from a depressed level, and Indian growth of +7.5 percent, as the agricultural economy improves.  Latin American 2010 GDP growth will be driven by demand for raw materials, energy, and domestic consumption.  Given this, we modestly increased our 2010 GDP forecast in that region to +3.5 percent from +3.0 percent.  Our global economic forecasts are contained in Exhibit A.  As illustrated last quarter, Exhibit B shows that the latest OECD Composite Leading Indicators signal a significant recovery in all major economies.  Additionally, as seen in Exhibit C, emerging economies contribute more to world GDP growth than developed economies, at 66 percent.  China now represents 7 percent of world GDP, up from 2.5 percent in 1995, see Exhibit D.  As we move into the next decade, emerging markets will become an even larger factor. 

While monetary and fiscal measures are gradually being withdrawn to contain potential inflation, we don’t believe there will be material inflation in 2010; rather, we fear higher inflation in 2011 and beyond.  Commodity prices, such as basic materials and energy prices remain at elevated levels while agricultural commodities are well off their highs.  Given the strong demand from emerging markets, we expect basic materials and energy prices to remain high.  In addition, as inflation fears begin to increase, we expect those commodities to be a “safe-haven” and potentially rise further.  We are monitoring the data, as we think inflation could have a big impact in some regions.  In other regions, such as Japan, deflation poses a bigger threat.  Exhibits A and E display our inflation outlook.

For a complete copy of the latest quarterly summary, click here: International Outlook & Strategy Summary (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.