Portfolio Manager Perspectives

Jeff Benjamin

Volatility is threatening recovery, says Wilmington Trust's Macey

Predicts slow-growth rebound, but double-dip recession a possibility

May 13, 2010 @ 12:10 pm

By Jeff Benjamin

The already fragile economic recovery in the United States has become even more so since the sudden spike in market volatility, according to Rex Macey, chief investment officer at Wilmington Trust Corp.

“We saw some fairly good economic reports a few weeks back, and the markets did well, but the debt crisis in Europe has been like cold water in the face,” he said. “People are now realizing that there is still high unemployment, and housing is anemic, and the volatility in the markets represents the extreme levels of confidence and despair.”

Mr. Macey said the economy is more sluggish than he expected it to be at this point, coming out of such a deep recession, which raises the level of uncertainty about the overall health of the economy.

“Right now, we still think a slow-growth recovery is most likely,” he said. “But we're not ruling out either a double-dip recession or a V-shaped recovery.”

The growing uncertainty was not helped by last week's brief 1,000-point drop by the Dow Jones Industrial Average, the cause of which remains undetermined.

“That was very bizarre, and the fact that it remains unexplained doesn't help anyone's confidence in the markets,” he said. “It's hard for me to believe that with all the electronic trails, it can't be figured out, and I don't think it was a fat-finger trade.”

Mr. Macey drew parallels between last week's unexplained market drop and the disastrous oil leak in the Gulf of Mexico.

“We've got dead coal miners, dead people on oil rigs, bank failures,” he said. “It reminds me of the fact that the whole regulatory system doesn't seem to be working very well.”

Concerns about the U.S. regulatory system, coupled with the sovereign-debt issues unfolding in parts of Europe, “will make it easier for the emerging markets to compete,” he said.

Mr. Macey said the investment committee of Wilmington Trust, which has $42 billion under management, met last Friday and decided to cut its exposure to international equities in developed markets by about one-third to around 18%.

“The regulatory issues make the U.S. less certain right now, but it's still more resilient and more dynamic than [developed] Europe,” he said. “There are no bargains or fat pitches out there right now, but we still like the emerging markets longer-term.”

If nothing else, those markets have better balance sheets, which means they will be driven by forces that are different from those driving the developed markets.

“The emerging-markets contract because they're worried about inflation, but we contract because we're worried about debt,” he added.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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