Week in Review
March 29, 2010
Recovery to Exceed Expectations: Barclays
NEW YORK-Following one the worst global financial meltdowns, the economic recovery has exceeded almost anyone's expectations and will get another jolt when employment numbers begin to improve in the next couple of months, according to Barclays Capital.
The key risk to the markets will be the withdrawal of policy stimulus in America and especially in China, which "faces an overheating economy growing at breakneck speed and needs slow growth reasonably quickly," according to Barclay's global research report.
Although the Fed's expected tightening will generate some volatility in the asset markets, it is seen as less of a threat because there is no imminent inflation threat, nor any desire to slow growth. Larry Kantor, director of research for Barclays, said at the firm's headquarters here that the global economy has grown at a 4% clip since the middle of last year to return to its pace prior to the economic crisis. Furthermore, he said the recovery is not in the "late innings," but rather just beginning. "The global economy is not only growing but it's growing at a pretty rapid clip," Kantor said. "You wouldn't know that from reading the newspaper and talking to people. Part of that is because the recovery is being led by the emerging markets, and the developed countries have lagged."
In addition, Kantor said that the labor market is also still weakened, which makes people leery of the recovery's strength. Yet, he predicts improving employment numbers in the next couple of months, which "will convince people we're in a self-sustaining recovery."
Kantor also called into question the emphasis many people have placed on budget deficits and the threat of double-dips, which he calls "backward-looking views" at the economy. Although the deficit will have to be addressed, he argued that recessions breed rising deficits, mainly because the way to fight back at a recession is through fiscal stimulus. As the most recent recession grew deeper, "[the government] threw the kitchen sink" at it. Thus, the budget deficit "is not the start of something new. This is a vestige of what we've been through," he said, adding that as that normal GDP growth returns, the deficit will subside.
Going forward, Barclays is recommending investors have significant exposure to equity and credit markets, hedged with a short position in U.S. Treasuries and a long position in volatility. Investors should be rewarded for taking risk over the next few months.
Financial Engines IPO Underscores Bright Future For Advice in 401(k) Plans
The hugely successful initial public offering earlier this month by Financial Engines, a retirement plan advisor co-founded by a Nobel Prize winner, affirmed investor belief in a business model offering low-cost sophisticated retirement advice to individual investors.
In its debut, Financial Engines' shares were originally offered at $9 to $11 each, but priced at $12. At deadline, they were trading at $17.71. "The market is looking for quality," said Bill Buhr, an IPO strategist at Morningstar.
Similar to Morningstar, Financial Engines offers retirement planning and investment advice to investors enrolled in company-sponsored 401(k)s and other defined contribution retirement plans. Launched in 1996, it uses an automated, web-based platform to collect information from investors and assess their retirement-income needs. It then uses mathematical algorithms to make recommendations.
"There is a growing market for financial advice, specifically for defined contribution plans," Buhr said.
In its registration statement filed with the Securities and Exchange Commission in December, Financial Engines said shifting retirement-industry trends would allow it to provide independent and customized portfolio management, investment advice and retirement advice to investors who are not affluent and would not be able to afford personalized services.
Much is said in the financial planning professions these days about how Americans are not preparing for retirement adequately. Evidently, a 14-year-old company that offers respected web-based advice has finally convinced the capital markets that its business model offers a viable way to address that issue.
Financial Engines provides easy-to-understand retirement advice, said Katharine Wolf, a senior analyst at Cerulli Associates in Boston. "What sets them apart is their ability to provide something that is not so much investment-focused as it is outlook-focused," Wolf said, adding she has heard from broker/dealers who have implemented some of the Financial Engines solutions for their employer-sponsored retirement plan advisory services.
Financial Engines generates revenue by signing contracts with employers and plan providers like Vanguard, which has been using Financial Engines' computer-based advice program since 2001. "We thought highly of their methodology, as a low-cost provider," said Linda Wolohan, a Vanguard spokeswoman. 'It made more sense to use a third-party provider for their computer-based model."
Financial Engines is appealing mostly to investors who want to be actively involved in their retirement planning and are comfortable using web-based financial services, she said.