Interview with: R. MCFall Lamm Jr., PhD, Chief Investment Officer and Chief Strategist, Stelac Advisory Services

1. Investment Opportunities in the New Paradigm
Interview with: R. MCFall Lamm Jr.,
PhD, Chief Investment Officer and
Chief Strategist, Stelac Advisory
Services
FOR IMMEDIATE RELEASE
Low interest rates make equity valua-
tions attractive and they could become
even more attractive, according to R.
MCFall Lamm Jr., Chief Investment
Officer and Chief Strategist, Stelac
Advisory Services. Many investors
remain underinvested in equities under
the presumption that a recession is
imminent, he adds.
R. MCFall Lamm Jr. is a speaker at the
marcus evans Private Wealth
Management Summit June 2019,
taking place in California, June 3-5.
What exactly is the new paradigm?
The new paradigm refers to the funda-
mentally changed investment world that
emerged following the global financial
crisis. Throughout most of prior history,
private sector leverage increased
virtually continuously year after year
and decade after decade for most
developed economies. Steady credit
growth spurred higher economic growth
as borrowed funds were put to work.
When the financial crisis came, eco-
nomic agents rediscovered downside
risk and found themselves over-levered.
Private sector credit growth as a share
of GDP ended as a result. Absent
continuous credit growth, the result is a
reduced economic performance. Central
banks pushed rates to zero and en-
gaged in quantitative easing to prevent
collapse.
What are the growth implications?
Private sector leverage as a share of
GDP remains lower than before the
financial crisis, and the era of ever-
rising debt-funded growth appears gone
forever (or at least a generation).
Accordingly, economic growth will
depend much more on fundamentals
such as productivity gains rather than
credit creation, which implies a signifi-
cantly slower pace of expansion than in
the past.
A natural consequence will be that
inflation and interest rates will remain
low. Furthermore, corporate profit
growth, which depends on economic
performance, will be correspondingly
more modest. This will mute equity
returns.
How can investors prepare for the
new landscape?
Investors should expect lower invest-
ment returns in the future. This scenario
is camouflaged at the moment by
massive cuts in corporate income taxes
in the US, which provided a once-in-a-
lifetime regime shift surge in EPS.
Equity exposure will still provide a risk-
premium return several percent above
bonds but with interest rates not
reverting to levels that prevailed in the
past, market performance will pale.
High-fee products are disadvantaged in
a low-return environment. For example,
if a risky investment provides a five
percent pre-fee return, then it is only
two percent for the investor after 2/20.
In the pre-crisis era, it was not unusual
for pre-fee returns to reach 15 percent,
with the investor realizing ten percent
after fees. Fees consume 60 percent of
performance in the low-return situation
and only a third in the latter. Low cost
ETFs will be increasingly in demand and
fee pressure on general partners will
intensify.
It is also important to employ robust
asset allocation as the business cycle is
not vanquished in the new normal,
especially with central banks struggling
to adjust in a low rate world. This
means avoiding multi-year product lock-
ups, which restrict investors’ ability to
make portfolio adjustments when really
needed.
What is the outlook for global
growth?
We are now in the midst of a modest
deceleration in global economic growth.
It is not unusual for growth rates to
fluctuate over the cycle and the current
oscillation should be temporary in the
absence of central bank error, deterio-
ration in trade conditions, or a worsen-
ing of partisan politics. The new stan-
dard appears to be for steady-state real
US growth of near two percent annually.
Presuming inflation averages two
percent, which is the Federal Reserve
target, corporate profit growth will
approximate nominal GDP growth of
four percent. Growth in Japan and EMU
will be closer to a one percent average
due to stagnant population expansion
and the fact that they remain mired in
liquidity traps with zero rates.
As for China, the country has emerged
as a mid-tier economic power. Growth
will continue to slow as a natural
consequence of the completion of its
multi-decade surge that came after the
migration to a more conventional model
relying on private enterprise after its
socialist quagmire.
Where are the best investment
opportunities?
Many investors remain underinvested in
equities under the presumption that a
recession is imminent. There is no
automatic time limit on how long
expansions endure and this cycle is
elongated due to its low amplitude.
Some investors are also erroneously
extrapolating from the crisis experience,
where the recession was extraordinarily
deep which is typical when financial
panics occur. With huge banking system
reserves and strict stress tests in place
after reform, a repeat is very unlikely.
When there is another recession, it is
likely to be mild.
Low rates make equity valuations
attractive and they could become even
more so once investors realize that the
end is not nigh. With Europe already
experiencing three quarters of sluggish-
ness, an upturn could be coming later in
2019. China has implemented both
monetary stimulus (lower reserve
requirements and rate cuts) as well as
fiscal policy loosening (tax cuts and
infrastructure spending). Chinese debt
levels remain worrying, but the China
story is not over.
When there is
another recession,
it is likely to be mild

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