The Upside of a Slowdown

12/01/2007 12:00 am EST

Focus: MARKETS

Justin Urquhart Stewart

Co-Founder, Seven Investment Management

Justin Urquhart Stewart told interviewer Tom Aspray that this is a good time to step back and look at the bigger picture. Economies—global and domestic—move in cycles. The central banks delayed a slowdown in 2000-2001 by cutting rates. Now, the current retracement was strengthened by the subprime crisis. But Stewart remarked that even if a technical recession—two consecutive quarters of negative growth—emerged, that’s not necessarily bad, as it serves to clear out the detritus, after which you can begin to slowly rebuild. He believes we will most see a pickup toward the end of 2008.

But the good news is that other parts of the world, like the emerging markets of China and India, are still attractive. Asked if there is anything that will alter his view of a slowly recovering economy, Stewart replied that a major terrorist attack or deepening financial crisis could change his forecasts.

But he added that the world has weathered lots of storms over the years, and investors just have to look through them to understand the larger picture. If a major crisis erupts, the central banks will most likely step in and investors can protect themselves by adjusting their asset allocation.

Aspray then asked about Stewart’s prospects for the US dollar. Stewart noted that every time a US Treasury Secretary says the dollar is getting stronger, it’s usually getting worse! But he added that prospects do seem to be improving with exports coming back and deficits narrowing.

Moving on to other currencies, Stewart commented that China is not revaluing their currency enough, and while the euro continues to be very strong, sterling seems to be overvalued. The yen, with the unwinding of the carry trade, is likely to strengthen, but it is rather unreliable, so he urged investors to be careful.

He summarized by recommending that investors concentrate on the euro for now, but be willing to switch back to the dollar when the trend turns—and perhaps consider selling sterling during this period.

Stewart told Aspray that commodities are currently interesting, especially now that investors have so much access to the markets. Gold continues to have potential—no yield—but can be used as a capital gain or loss. Currently, the constriction of supply, combined with increasing demand, nervousness about the global economy, and the ability for the Chinese and Indian populaces to now horde and collect the metal may push the price of gold up further. But investors may have to wait a little while for that to occur.

He cautioned investors to beware of commodity bubbles and keep an eye on prices, so that they can buy at lower levels. Still, he is bullish over the long term, especially on soft commodities like corn, wheat, and oils. Stewart said the biofuels craze is affecting the economies of Malaysia and Indonesia and the growing wealth in China that is creating demand for beef, as well as many other consumer products. He said that if you think Asian consumption is rapidly expanding now, just wait until the Chinese realize what they can do with a credit card!

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