Slowing global growth: It’s not investing as usual

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Investors relying exclusively on global stocks for returns could find the next several years to be unrewarding, said John Mauldin, a widely followed economist and best-selling author.

Valuations are high, the global economy is weakening, and U.S. corporate profit will suffer as a result, he said.

"If you're simply relying on a long-only portfolio to make your returns over the next seven years, you are whistling past the graveyard," he said. "There are a dozen different trading strategies; find a group of them that will work some of the time."

Mr. Mauldin, the chairman of Mauldin Economics and the man behind the popular investment newsletter Thoughts from the Frontline, was in Toronto on Thursday to speak at the CFA Society Toronto's annual forecast dinner.

Most of his forecasts stemmed from a view on slowing global growth. China pace of expansion is shrinking, although Mr. Mauldin does not foresee a hard landing absent a "serious policy error."

Instead, China is in the midst of a transition from a manufacturing and infrastructure-based economy to one resembling more advanced markets with an emphasis on services.

Chinese growth should continue, albeit at a more subdued pace than that to which the world has grown accustomed. Eventually, however, the Chinese economy will come to resemble developed peers in its susceptibility to the business cycle.

One day, China will experience an "actual recession," he said. "The world will not end."

The U.S. economy, meanwhile, will struggle to beat 1.5 per cent annualized GDP growth over the next several months, he said. "That is stall speed. It only takes a small shock until you are in a recession."

A market downturn accompanied by a recession could draw down U.S. equity values by 40 per cent, he explained. And even in the absence of economic contraction, he expects a 20-per-cent correction within the next year.

Over the next seven years or so, he is forecasting global equity values at no better than flat. "If you don't have some kind of alternative strategy, the technical term is, 'You're screwed,'" he said. "We're going to have to learn to be more creative in how we find yield."

For one, he said he suspects that the bull market in U.S. bonds is not over, unlike many market observers shifting gears in anticipation of rising rates. Mr. Mauldin expects rates to decline, and for U.S. government 30-year bond yields to challenge the 2-per-cent threshold.

Additionally, he said he's sticking with his call on shorting the Japanese yen, which he called the "trade of the decade" a couple of years ago. "There's still room in that trade," he said.

There is also room for advancement by Japanese "intellectual property" stocks, he said. "They make cool stuff. And their companies are going to export more, and their currency is going to keep going down."