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U.S. Corporate Growth Is Going Overseas

The economic outlook for 2011 is great for corporate America but lousy for the rest of us, according to MFS Investment Management.

At their annual year-end press briefing last month, MFS Investment Management had bad news for the average U.S. consumer. While corporate America has managed to regain the profit peak of 2007 by hoarding cash and catering to overseas customers, “They are less oriented to U.S. consumers than any time in history,” says James Swanson, chief investment strategist. For the first time, says Swanson, 60 percent of the business done by companies listed on the Standard & Poor’s 500-stock index is foreign-based.

It’s crystal ball time on Wall Street again, an annual holiday tradition in which financial industry gurus bring out their year-end briefings on next year’s investment outlook. Institutional Investor will be dropping in on several and reporting back on the prognostications.

The best that MFS Investment Management can foresee for the United States for the next few years is GDP growth of 3 to 3.5 percent. Unemployment continuing at significantly above 5 percent. Fat profits for corporate America, with especially good prospects among technology and utility stocks. No French-style riots on the streets.

And that’s if the politicians at the extremes of both parties don’t mess things up, most likely by panicking over unemployment. “It is a bit bearish,” admits Erik S. Weisman, manager of several MFS bond and government portfolios.

A big problem for Weisman and his colleague, is that many of the trusted rules the financial world used to depend on simply don’t work anymore. About half their statements begin with either “I don’t know” or “for the first time.” For instance: “This is the first time in the postwar era we have had a significant recession and have not had a V,” as in, a V-shape, or quick and strong, recovery. (Weisman) And: “Historically, if you have slow growth, then you shouldn’t own stocks. That has completely broken down. Companies have figured out a way to collect cash.” (Swanson).

Indeed, Weisman thinks the potential for a dramatic “paradigm shift” is “higher than it has been for a long time.” The most likely change, he says, is “a different sort of inflation environment where we’ll see rapid swings between high and low inflation or even deflation.” The dollar could lose its dominance, perhaps through a return to the gold standard, or perhaps replaced by another currency, “if we extend these [Bush-era] tax cuts and we don’t have any consensus on budget cuts.”

For investors, Swanson favors tech companies because “they export something” – as he puts it, “Tech has an implicit call option on the urbanization of Chinese youth and Indian youth” – and utilities because they are one of the two highest-dividend sectors, their stocks are cheap, and demand is rising. Weisman, meanwhile, suggests that perhaps green tech may replace the service sector as a growth area, as we eventually run out of new services to provide and clients for those services.

Weisman goes all the way back to 1860 for some of his comparisons, and it turns out that the stretch from about 1870 to 1914 was pretty good. It boasted stable inflation and the biggest spurt of global trade and capital mobility until the post-World War Two era.

Well, then, the solution to our current problems is obvious: Bring back Rutherford B. Hayes and Kaiser Wilhelm.

Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.

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