Stocks: What to Watch for in the Recession

Don't be surprised to see a new wave of consolidation as stronger players snap up weaker ones

Eventually, the crisis will end. That has investors contemplating what a post-crisis stock market might look like.

Predictions of a serious economic downturn are everywhere, and not just for the U.S. but for the entire globe. If the credit crunch lasts long enough, it could be the first truly deep economic pullback in a generation or longer.

Asked about the future, many professional investors and fund managers say they're far too preoccupied with the current crisis to make any long-term bets. That's why many refuse to buy stocks—the unprecedented global credit crunch has made solid predictions all but impossible.

"I'm going to wait until the dust settles," says William Rutherford, president of Rutherford Investment Management.

Glimpsing the Future

Still, investors will eventually have to picture what the new economic order will look like.

Arguably, a credit crunch or recession makes all of us losers. But even in a severe recession, some businesses survive and prosper—even if only on a relative basis, and even if they take years to muddle through.

"There's always going to be a winner out there," says Ryan Crane, chief investment officer at Stephens Investment Management Group.

Here are five trends that may emerge whenever the crisis finally ends:

1. The strong eat the weak.

In the financial sector, failing banks and brokerage houses have already been gobbled up by safer (if not exactly strong) rivals. Bank of America (BAC) bought up mortgage giant Countrywide Financial and Merrill Lynch (MER). JPMorgan Chase (JPM) absorbed Bear Stearns and Washington Mutual. Citigroup (C) and Wells Fargo (WFC) battled over buying Wachovia (WB).

If the economic downturn is bad enough, expect the same trend to hit other industries, as strong players either buy or take market share from companies in financial trouble.

2. Fast-growing companies might not get the funding they need.

The credit crunch is cutting off the financing that helps businesses grow and create new jobs, says Michele Gambera, chief economist at Ibbotson Associates, a unit of Morningstar (MORN). Companies can't float issues on the stock market or sell bonds—investors won't buy them. And they can't borrow from banks, which are too panicked to lend.

If those conditions persist, it means trouble for new growth companies. "Who is going to make the next Google (GOOG) if there is no money to borrow to build the next Google campus?" Gambera asks.

3. Cash is king.

In a credit-starved economy, the advantage goes to companies with strong cash flow. Gambera cites cigarette maker Altria Group (MO) as a company famous for its strong cash generation.

A healthy balance sheet—without much debt—will also be crucial. "Given the fact that credit markets have totally deteriorated, it's a question of survival," says Gary Wolfer, chief economist at Univest Wealth Management (UVSP).

He believes survivors could include consumer staples and health-care companies that sell products their customers need and that generate lots of cash in the process. He cites Procter & Gamble (PG) and Johnson & Johnson (JNJ).

4. Don't bet on the U.S. consumer.

Wolfer predicts "an awful Christmas" for retailers. But for consumer-oriented companies, the problems aren't just short term.

For a generation, the U.S. has created a "quadruple deficit," Gambera says: a government deficit and a trade deficit, along with heavy borrowing by the financial sector and, finally, by U.S. households. Few expect Americans' reliance on credit cards and cheap home mortgages to continue.

In fact, many commentators see a fundamental shift in the U.S. economy, away from a reliance on both debt and the overstretched American consumer. "The era of the consumer-based U.S. economy is coming to an end," Wolfer says. "Our whole economy is going to be much more export-driven."

5. Don't bet on the global infrastructure boom, either.

Wolfer and others may be pinning their long-term hopes for the U.S. on exports. But there are lots of worries about one force driving global demand for U.S. goods: the building boom in many emerging economies around the world.

In a global slowdown, many are betting that demand for capital equipment, commodities, and energy are going to fall off.

Emerging economies, such as China and India, may not slip into recession, but their rapid growth will probably slow, says Chad Deakins, portfolio manager of the RidgeWorth International Equity Fund. "There are going to be different problems each country is going to have to address, [problems that will] distract them from plans to build infrastructure," he says.

Five years from now, however, Deakins expect emerging countries to start building again. "There are a lot of people in the world who want a higher standard of living and are willing to work for it," he says. "That's capitalism."

posted by Yanto Sanusi @ 8:15 PM