State Street Economist Says Emerging Markets to Top U.S. Stocks Into 2011

Emerging-market stocks and bonds will outperform U.S. equities into 2011, Christopher Probyn, chief economist at State Street Global Advisors, said today in a presentation to reporters.

“There is a sustained global recovery, but a lackluster one,” said Probyn, whose Boston-based firm is the world’s second-biggest money manager for institutions. U.S. equities will “grind higher” amid volatility and economic growth of about 3 percent, he said.

U.S. consumers, hurt by declining home prices and stock- market losses, will restrain spending, according to Probyn. Without the consumer as an economic driver, the unemployment rate, now at 9.6 percent, won’t fall back to its 2007 level of less than 6 percent until 2014, he predicted.

“At this stage in the recovery, people are supposed to be spending,” he said. “They’re not. They’re saving.”

Probyn said he doesn’t expect the U.S. Federal Reserve to lift its benchmark lending rate from near zero until at least the second half of 2011, preventing any near-term sell-off in the bond market. Bond prices traditionally fall when interest rates rise. Bond mutual funds pulled in $155.5 billion in net new investments in the first half of this year, according to the Investment Company Institute, a Washington-based trade group.

Probyn said he expects emerging markets such as China to continue outperforming developed countries. The Chinese government has “plenty of policy ammunition” to address the drop in gross domestic product to 10 percent in the second quarter from 12 percent in the first three months of the year.

Emerging Markets

The MSCI Emerging Markets Index, excluding dividends, rose by an annual average of 8.6 percent in the 10 years ended Aug. 31, compared with a 1.8 percent decline by the Standard & Poor’s 500 Index of U.S. stocks. This year the emerging-markets index has climbed 4.9 percent while the S&P is up less than 1 percent.

State Street Global Advisors, a unit of State Street Corp., invested $1.78 trillion for clients as of June 30. Only New York-based BlackRock Inc. managed more money for institutional investors including pension funds, banks and insurance companies.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

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