By Bruce W. Fraser
Wilmington Trust gave a sobering assessment of the U.S. economy and in particular investment grade bonds whose stability has been comforting to investors lately.
Rex Macey, chief investment officer of Wilmington Trust Investment Advisors Inc., said, "The concept of 'safe' assets and 'risky' assets can be misleading. Rising interest rates will offset the increased income, leaving investors and investment grade bonds with little or no return after inflation."
Macey outlined the findings from Wilmington Trust Investment Advisors Inc.'s seven-year capital markets forecast at a press briefing yesterday in New York this week. WTIA is the investment management arm of the trust firm, based in Wilmington, Del.
Other speakers included Lawrence E. Gore. president and managing director of Wilmington Trust's New York office, and Carol G. Kroch, head of wealth and financial planning and managing director, charitable trusts. Roger W. Hobby, president of the Northeast region of Wilmington Trust, served as moderator.
Macey said the U.S. economic recovery remains fragile. "The financial crisis has damaged financial institutions, credit is tighter, and the consumer is deleveraging," he said.
WTIA's capital markets forecast of 2012-2018 anticipates annual returns of roughly 2.0% on investment grade bonds, both taxable and tax-exempt, way below what investors have earned on these bonds recently. Wilmington Trust expects U.S. inflation to remain contained, averaging 2.3% during this period.
He said Wilmington favors bonds that offer higher spreads for credit risk-floating rate notes, high-yield corporates, and emerging market debt. "We're looking for yields where you don't have to take on additional duration," he said.
These bonds are forecast to deliver analyzed returns in the 6.2-7.7% range. The group also favors large-cap U.S. stocks, with expected annualized returns of 8.5%, small and mid-cap stocks with expected returns of 7.7% to 9%, and developed international stocks in markets like Europe and Japan, which are expected to achieve higher returns than domestic stocks.
"Investors have shunned them so much that they are attractively priced relative to domestic stocks," Macey said.
Wilmington Trust also favors commodities and global natural resource investments as "as hedges against unexpected inflation," according to Macey.