Mike Ryan of UBS Wealth Management Offers His Financial Outlook
Monday, November 05, 2007SUZANNE PRATT: Joining me now to talk about his outlook for the broader market is Mike Ryan, chief investment strategist at UBS Wealth Management. Mike, welcome back to NIGHTLY BUSINESS REPORT.
MICHAEL RYAN, CHIEF INVESTMENT STRATEGIST, UBS GLOBAL WEALTH MANAGEMENT: Thanks Suzanne.
PRATT: How it is possible that the Dow is still at 9 percent for the year when we're seeing all of this turmoil in the financial sector, not to mention oil prices nearing $100 a barrel?
RYAN: Well, it's proved the resiliency of this market. I think there are a couple things that the market has in its favor. First of all, it's not a terribly expensive market. Even though we've had a decent move (INAUDIBLE) in the Dow, the S&P is only up a little bit less than 6 percent and we're seeing is that from a multiple basis, this market is not very expensive. Again, on the P/E, it's trading about 15 times. And even though we have seen a slowdown and are likely to continue to see a slowdown, especially in earnings in the financial sector, overall earnings momentum hasn't collapsed, especially from those companies that generate earnings from outside the U.S. So broad based we have a decent market because it's well supported from valuation and we continue to see decent earnings momentum, especially from companies outside the United States.
PRATT: So what happens if the turmoil in the financial sector continues, if we continue to see companies with large write-downs and if the financial sector stocks remain under pressure? What happens to the broader market then?
RYAN: This is going to pose a bigger challenge. And I think it's on two fronts. First of all, it's not just the impact in terms of the re- pricing within the equity markets, but it's also potential spillover effect as you noted to the real economy, because at some point, when does a financial market event begin to trickle and become a real economic event? When does it start to weigh on investor sentiment? When does it start to weigh on consumer confidence and when does this prompt a response from policy makers? So from my perspective, what we are going to see is, if we continue to see further fallout from financial services, if this begins to take a bigger bite out of the equity markets in general, then you run the risk that this translates into a real economic event.
PRATT: Would you be a buyer at all of financial stocks at these levels? Some of them have gotten pretty beaten up in the last few weeks.
RYAN: You want to be a little careful here. We do see value in the sector. There's no question there. What we've seen is the proverbial babies being thrown out with the bath water. We've seen a lot of financials kind of lumped together. And while we do think there is going to continue to be writeoffs and probably into the fourth quarter and there is significant exposure in the sub-prime sector, it doesn't mean that the exposure is going to be necessarily uniform throughout the sector. But again, what we want to emphasize here is not necessarily trying to bottom fish in the financial sector, but rather we want to position those sectors that we think are pretty well positioned at this point of the cycle. That is, we like consumer staples because of the defensive element. We also like, for example, industrials and technology because of the ability to leverage growth prospects outside the United States.
PRATT: So what do you believe is the greatest risk for the stock market right now?
RYAN: I do think what we already talked about. The greatest risk is that we see lack of transparency in some of the losses in the sub-prime sector and further fallout in the financial services, that this now becomes a bigger factor, that it starts to weigh again on investor confidence and that we start to see this play out over a multiple quarter. We don't see it over a one or two-quarter affair, that it stretches into 2008 and then what you start to see is the ability for consumers to go out and spend money because of their lack of confidence. That starts to be impacted.
PRATT: So are you factoring a recession into your outlook for 2008?
RYAN: It's certainly one of the risk scenarios. We don't want to be for a moment dismissive of it, but our baseline forecast right now is not for recession. It's just for significantly slower growth. We do think that the combined impact of the fallout from housing, the significantly sustained higher energy prices, that's going to certainly weigh on consumer spending, but there are also some positives here. Keep in mind what we do continue to see is robust growth outside the United States, the fact that we do expect the Fed to continue lowering interest rates. Those are some of the positives that will offset some of the drags we see in the economy.
PRATT: OK, Mike. I think we have to leave it there. Thank you for joining us.
RYAN: Thanks, Suzanne.
PRATT: My guest this evening Mike Ryan of UBS Wealth Management.
