Get Ready for Recovery

These days, when people corner Eric McKissack at social gatherings and ask for investment advice, he offers up this little gem: “The panic period has passed. If you haven’t already gotten back into the market, you should. This is a good time to be looking at your portfolio in the context of a multi-year recovery.”

McKissack, CEO and chief investment officer of Chicago-based Channing Capital Management, is a devotee of value-minded investing. As such, he and his staff are interested in stocks ready to rebound while showing sustainability. To prepare for what he sees as an imminent upswing in the economy, McKissack suggests that investors seek out shares in companies that are likely to participate in the economy’s resurgence–those that operate in the technology, industrial materials, and consumer discretionary sectors, for instance. Channing Capital, founded in 2004, manages stock portfolios for a variety of institutional clients, including public employee retirement funds, corporations, universities, and foundations. McKissack’s firm also manages two publicly traded mutual funds for the Calvert Group–the Calvert Small-Cap Value Fund (CCVAX) and Calvert Mid-Cap Value Fund (CMVAX).

So, you believe the worst is behind us–both in the economy and the financial markets?

Like I said, the panic period we saw is over. Investors are starting to focus on longer-term fundamentals again. On the whole, 2009 will continue to be a good year for the markets. There will be some retail investors moving back into the market–not satisfied with what they’re gaining in money market accounts. I would say double-digit increases [for the major stock indices] for the year are not out of the question. We may not go there in a straight line, but we will hold on to some of the gains we’ve seen this year as investors gain confidence that there will be an economic recovery. It’s about the tailwind of the stimulus working behind us.

Any reasons to be cautious, getting back in?

Yes. We’ve seen some of the worst performers and most distressed companies recover nicely in the market’s rebound, and some of the best companies lag. We don’t think that will continue.

How do you see the economic turnaround unfolding?

Economically, we won’t have a typical recovery. Early in 2010 is when we see the economy bouncing back. There should be some signs in the first half of the year. But large deficits and increased deleveraging by consumers will make this a less robust recovery than those in the past. Unfortunately, people may not feel better because the employment picture won’t be that good. Hiring might return in a meaningful way in late 2010, but we may see a recovery where a lot of jobs might not return. I think unemployment could reach double digits, and I’m not sure when we would get back below that. But when we do, higher single-digit unemployment may be around for a while. The numbers we’re accustomed to seeing in a recovery won’t be the same. The historic stimulus will definitely lead to a recovery, though.

What industries or sectors should investors consider in the early stages of recovery?

Conventional wisdom is that early cycle plays such as consumer discretionary, financials, materials, and industrial cyclicals will do well. Those can be attractive areas for investors. Some of those stocks have moved closer to fair value levels lately. So, you should be careful that the expectations of recovery aren’t already priced in.