When PIIGS Attack

If there was ever any doubt that we’re in a closely intertwined global economy, the Greek debt crisis—not to mention the fragile-to-awful situations in Portugal, Spain, Ireland, Iceland, and the U.K.—should dispel that.

Roger Sit never doubted it. He is president, CEO, and global chief investment officer of Minneapolis-based Sit Investment Associates, Inc. In addition to managing his firm’s domestically oriented equity funds, he manages its international-growth and developing-markets growth funds.

All of this gives him an acute awareness of just how intertwined things are when it comes to investing. Sit says it’s no longer enough for investors to seek international exposure in their portfolios. Now, they need to be selective about that exposure and find the right economies and companies abroad.

With all the encouraging signs of an economic recovery both domestically and in many parts of the world, why has this market been so fragile?

SIT: We need the economy to support corporate earnings growth, which will lead to stock price appreciation. The liquidity that has been pumped into the system, whether in the U.S. or abroad, has helped the markets recover. The markets are up 60 to 70 percent from the March 2009 low, which looks like a traditional market recovery coming out of a recession. But this wasn’t a typical recession. The recession we experienced had some of the hallmarks of the Great Depression, and the actual recovery from this economic slowdown is going to be very much subpar.

What does a normal recovery look like?

SIT: Historically, the economy coming out of a recession should be growing in the 5 percent–plus range in the year following the contraction. In this case, the consensus is that we’re growing in the 2.5 to 3.5 percent range. So it’s a very subpar economic recovery. If you look at the market movement off of its low, that 70 percent market recovery looks more like a response from a typical economic slowdown, and this recession was anything but typical.

So it’s not surprising that we’re seeing a lot of mixed views out there. We still have very high unemployment, governments with very high debt levels, and the banks are reluctant to lend. And the only real reason we’ve seen a big movement in the market and improved earnings is because of the government-based liquidity pumped into the system.