Persuading your clients not to abandon equities when stock prices plunge is never easy. With today’s wide, anxiety-inducing swings of major market indices around the globe, this job is even more challenging.

But most financial analysts and strategists think that’s the best advice you can give to your clients. After all, stock markets recovered from the 2008 plunge — and there’s no reason to think they won’t bounce back again. Furthermore, there’s the issue of alternatives: into what other investments would your clients put their assets in this low interest rate environment?

However, this philosophy does not preclude some tweaking of equities portfolios. Many analysts suggest increased weightings for defensive sectors that are less affected by downturns. Some advise moving to a “neutral” weighting in equities from “overweight,” given the level of uncertainty. And stocks of companies with good records for increasing dividends are popular recommendations.

Some analysts favour resources firms, particularly in the energy and gold sectors, in the belief that continued strong growth in emerging markets will keep the prices of those commodities high.

Corporate bonds are also on many “buy” lists because many companies have solid balance sheets and may have their credit ratings upgraded.

Some analysts are far less optimistic — believing that we are on the cusp of a serious bear market and a deeper recession than that of 2008. But most think that the U.S. will avoid recession, putting the odds of a downturn at around 35% — up from 20% a few months ago but still well below 50%.

The consensus is for real gross domestic product growth in the U.S. of about 2% this year and next — enough to keep the unemployment rate from rising but not to bring it down significantly.

As a result, these analysts think that the plunge of almost 20% in U.S. equities in early August was an overreaction. (Indeed, part of that drop was reversed fairly quickly.) These analysts suggest that U.S. equities markets should stabilize, with an ultimate correction of about 10%.

And although they predict that growth in the economies of China and other emerging countries will slow somewhat, these analysts believe that this growth will still be strong enough to keep resources prices high, with oil, for example, at about US$90-US$95 a barrel — good news for both Canada’s GDP growth and Canadian stocks.

At the optimistic end of the spectrum is Jean-Guy Desjardins, chairman, CEO and chief investment officer with Montreal-based Fiera Sceptre Inc.

Desjardins believes stock markets are currently priced for a recession and he expects a significant rally as U.S. economic growth of 2%-2.5% surprises on the upside in the next 18 months. His thesis is that the U.S. Federal Reserve Board and the U.S. government will do whatever is needed to make sure the U.S. GDP grows at this pace.

Over the medium term, Desjardins sees equities rising by an average of 7%-8% a year, which means there will be big gains for some stocks, particularly from the periodic downward corrections he anticipates will occur.

Not surprising, Desjardins is overweighted in equities, with a focus on cyclical stocks, including consumer and industrial stocks in the U.S. and resources in Canada. He’s also overweighted in corporate and provincial bonds, as well as in cash — to be used to buy equities at appropriate times — and underweighted in Canada bonds.

At the pessimistic end of the spectrum are the economists and analysts who believe that tougher economic times are just around the corner. For instance, Ross Healy, chairman and CEO of Strategic Analysis Corp. in Toronto, believes the U.S. is in a predicament in which its debt is so high relative to GDP that it will prevent that economy from generating economic growth even when fiscal and monetary stimulus are applied — and so the debt will keep spiralling upward. (Healy believes this is what happened to Japan, whose real GDP is no higher today than it was in the mid-1990s.)

If Healy is right in his view that there will be virtually no growth in the U.S. economy this year and next, there will be a big correction in equities valuations.

This suggests that your clients should be mainly in cash, with some gold and energy exposure. In the case of gold, your clients should consider shares in gold-mining firms rather than bullion because gold stocks have tended to outperform bullion. (See story on page 26.)

Healy anticipates some opportunities for trading in equities, but these will be short forays to take advantage of the periodic rallies that will occur.

David Rosenberg, chief economist and strategist with Gluskin Sheff & Associates Inc. in Toronto, believes that the U.S. won’t be able to manage much growth and that further declines in stock markets are likely.

However, he has a different investment strategy — he suggests that your clients invest one-third of their portfolios in each of corporate bonds, net short hedge funds and equities mainly focused on the hard assets of gold and food.

Then, there are analysts and economists whose views lie somewhere between the optimists and pessimists.@page_break@In general, this group believes that the U.S. economy will continue to grow by at least 2% a year, but they are more defensive in their investment strategies because they have less confidence that the Fed and the U.S. administration will be able to avert another recession.

The reason for this caution is the concern that neither the U.S. nor Europe has a credible plan to reduce their mountains of government debt to reasonable levels. The problem is that any strategies eventually decided upon to deal with the debt issue are likely to involve tough austerity programs for extended periods, with cuts in entitlements and higher taxes. To succeed, these programs would require a high level of bipartisan co-operation.

Stéphane Marion, chief economist and strategist at National Bank Financial Ltd. in Montreal, has moved from an “overweight” recommendation on equities to “neutral,” with a focus on defensive sectors and stocks with good dividend yields.

Also favouring defensive, dividend-paying sectors such as utilities, telecoms and REITs, as well as preferred shares, is Avery Shenfeld, chief economist with CIBC World Markets Inc. in Toronto. He cautions that stocks should be picked on a company-by-company basis.

David Andrews, director of investment management and research with Richardson GMP Ltd. in Toronto, is in the defensive camp as well, favouring stocks that are high-quality, blue-chips and/or dividend-paying. He notes that Canadian banks are safe, liquid and pay growing dividends — even though they are “procylical.”

Andrews thinks there is too much uncertainty to recommend investing in resources. He suggests that if your clients want to invest in these sectors, they should stick to large-cap companies and stocks that are in less volatile subsectors of the resources industry, such as pipelines.

Leo de Bever, CEO of Alberta Investment Management Corp. in Edmonton, takes a long-term, 10-year approach to investing. He likes the prospects for equities better than those for bonds, anticipating “average” returns in North America.

De Bever also considers Europe more worrisome but says there are good opportunities in South America, in which countries are charting a more independent course than during the past 20 years. He’s less confident about prospects in Asia.

The bitter political battle to raise the U.S. debt limit — a struggle that ultimately led to the downgrading in August of U.S. government debt to AA+ from AAA by New York-based Standard & Poor’s Corp. — still reverberates around the globe. There are few signs that policy-makers have started to pull together.

Most analysts say there is no chance of the U.S. defaulting on its debt, thus taking issue with S&P’s downgrade. These analysts believe downgrades should be reserved for situations in which the risk of default is increasing. (It is noteworthy that the other two major U.S.-based rating agencies — Moody’s Investors Service Inc. and Fitch Ratings Ltd. — did not follow S&P’s lead.)

The broader risk is that such a downgrade can erode confidence. Financial markets experts may dismiss the risk of a U.S. default, but consumers and businesses can only assume that S&P foresees real problems.

One side effect of the downgrade on U.S. debt was that other AAA-rated countries have come under public scrutiny — resulting in rumours that France, the second-largest economy in Europe after Germany, had potential problems. That rumour doesn’t inspire market confidence, either.

But there is little question that the economic situation in Europe is becoming increasingly worrisome, with rising concern about sovereign debt levels in Spain and Portugal on top of the well-known problems in Greece and Ireland.

Analysts say that steps taken by European bankers and governments to deal with the sovereign debt issue aren’t sufficient, and that more money and greater fiscal co-ordination is needed.

Many governments in Europe are in denial, de Bever says, and don’t acknowledge that their “pay as you go” pension and public health-care systems can’t survive as their populations age. He notes that the Netherlands government has managed to come up with changes to its pension system that will make it affordable — yet, no other European government is following suit.

Desjardins is the more hopeful. He believes that at the urging of Germany and France, a pan-European government will emerge by 2012, resulting in more centralized fiscal policy. In the meantime, he expects the European countries to do whatever is needed to keep the ship afloat.

Desjardins is more worried about China, believing that the only way that country can avoid hyperinflation is to appreciate its currency substantially and move to a floating renminbi.

If China doesn’t do so, its growth could slow eventually to 5%-6%, which would be recessionary for that country. IE