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Some Stocks May Actually Benefit From Slow US Growth


Good fundamental stock pickers may have the best shot at investment success under a scenario of slow GDP growth in the US and developed world.

Stock Pickers Could Make a Comeback

In a prosperous economy where "a rising tide lifts all boats," returns among investments may tend to be undifferentiated. But in a dog-eat-dog world of the future in which growth and profitability are difficult to come by, there will be greater differentiation among winners and losers. Fundamental stock pickers, long and short side, should be able to thrive in such an environment.

Furthermore, in a prosperous economy, index funds, quasi-index managed funds, and broad ETFs provide a lazy means of achieving acceptable returns. In a scenario of low GDP growth, the returns on index funds, quasi-index managed funds, and broad ETFs will be concomitantly low. In addition, commissions and fees will represent an ever greater portion of the meager returns thereby negatively impacting the attractiveness of these investment vehicles.

Finally, a slow-growth scenario in the developed world will probably imply a general tendency towards dampened stock market cycles, once the current adjustment phase is completed. Think of the 1960s and 1970s. This implies less value added from market timing strategies employing index funds and ETFs as the primary investment vehicles. Conversely, the implication is more value added derived from stock-picking strategies that employ individual stocks.

A potential consequence of the aforementioned trends is the return to prominence of the fundamental stock picker. A premium will be placed on professionals that are able to pick out winners from the losers among individual stocks and who are able to value equities correctly.


US GDP growth might potentially slow in the next few years as a result of demographic forces and/or as a result of debt reduction, but it won't happen because of a slowing pace of technological change. Due to the nature and stage of the current technology dynamic, the pace of technological change will only continue to accelerate.

Similarly, slower growth rates in the US and the developed world due to demographic factors and high debt won't stop growth in developing countries where demography is more favorable and debt levels are low. It will also not stop the citizens of less developed countries from aspiring to achieve the standard of living enjoyed by people in the developed world. Indeed, the high availability of global liquidity implied by the demographic and financial situation in the developed world implies the opportunity for high GDP growth rates in the developing world that's starved for capital.

In sum, certain types of growth-oriented stocks, and certain types of emerging market stocks in particular, should be major beneficiaries of a slow growth environment in the US and the developed world. Good fundamental stock pickers (an extremely rare breed in any age) should be able to thrive in such an environment.

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No positions in stocks mentioned.
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