DB Advisors sees growth as the biggest obstacle to U.S., European economies, not downgrade

By Stephanie N. Rotondo

Portland, Ore., Aug. 9 - The recent downgrade of the United States' sovereign debt rating by Standard & Poor's has resulted in increased fears about the country's economy and financial footing.

But professionals from DB Advisors think the rating change is not driving the market as much as some might think.

"I really don't believe that what we have been seeing in the last few days is directly linked to the S&P downgrade," said Steve Johnson, chief investment officer, during a Tuesday conference call discussing the recent turn of events and the resulting impact on the fixed-income markets. "It really isn't forced selling driven by the downgrade."

According to Johnson, investors were already risk-averse and the European economic climate has not helped.

Domestically, the flight from risk is not due to downgrades but to a lack of growth, according to Josh Feinman, DB Advisors' global chief economist.

"The problem we have, both in the U.S. and globally, is not the downgrade but a growth problem," Feinman opined.

He conceded that the recent downgrade did add to investors' anxiety, but maintained that it was a growth issue.

"The concern is that the economic recovery has been anemic," he said. "Momentum has lessened this year." Even outside the United States, "the picture isn't much better."

In Europe, despite recent aggressive moves to stem the so-called "Euro-contagion," the "underlying problems remain," In order to address those concerns, Feinman said he believed that Europe should "move to a somewhat closer fiscal union," though several countries have expressed "great reluctance" to do so.

"We don't get that endgame to the European problem until that tension is resolved," he said. And until then, Europe's growth prospects "remain pretty lackluster."

"The downgrade doesn't make anyone's life easier," said Johnson. And to that end, "it makes it even more imperative" to find a solution to the U.S. and Europe's fiscal woes.

Economic recovery 'paramount'

If growth is the end goal in both the United States and Europe, then fiscal responsibility becomes the means to the end. However, Feinman cautions that the current debt-focused dialogue is not helpful in stimulating an already anemic economy.

"Getting this economy going should be of paramount importance," he said. "We've taken our eyes off the ball and become focused on debt."

Feinman believes that focusing on short-term austerity will not help stimulate growth. Instead, he is calling for long-term reforms combined with short-term stimulus.

This process, he says, will take time.

"We've got to put more distance between ourselves and that housing and credit bubble," he said. "It's a process of healing but it's not an overnight thing. If we move to fiscal austerity too soon before those headwinds go away," progress will be hindered.

"Real strong growth is going to take some time," he said. "It will be years before housing can contribute to growth."

Fixed income not materially affected

As many investors are worried about a 2008 market redux, the panel attempted to soothe frazzled nerves.

Johnson noted that the rating changes would have more of an impact on fixed-income portfolios than equities, he added that the fixed income landscape is very different.

"I really don't see the types of fundamental problems that we had to deal with in 2008," he said. In fact, he went so far as to call corporate fixed income instruments "attractive."

He did mention that the construction of portfolios might be altered a bit, but not too drastically.

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