Stock returns next year may be muted
Interview: Banc Of America Capital Management---Quinlan, Joseph---Equity Strategist
>> Welcome back. breaking news in retail. target cortion saying that same-store sales last week were below plans and the company said that sales at discount and other stores were below plan, as well. target had forecast 5% to 7% in sales at discount stores. target’s overall same-store sales was forecast between 4% and 6% with that news that last week’s sales came in below plan, we’re seeing target shares in extended hours down 12 cents right now, trading at $37 a share. for most of the year, small cap stocks have outperformed large cap counterparts. the russell 2000, a broad measure of small cap stocks , is up 40% this year. while the dow, the price weighted average of 30 blue chip companies is up only 20% and our next guest expects that trend to change as we head into 2004. he is joe quinlan, chief market strategist at banc of america capital management, joining us from new york with his view on the markets. last week, bloomberg news released a survey of economists showing they predicted full year 2004 economic growth at 4.4%. if they’re right, that would be a faster growing economy than both 1998 and 1999, years that felt robust. the last year the economy grew faster than 4% was 1984 but you’re saying stock returns next year may be muted. why?
>> first of all, we have a good head of steam with the u.s. economy. we entered 2004 with virtually all cylinders firing, consumer spending is very strong, private capital investment is picking up and the fiscal stimulus is working its way through and in in the trade front, we see improvement. a lot of this has been priced into the markets already, particularly in the first, second quarter of next year. we’re going―in 2003, it was a great year, no doubt about it but i think we’re going into a googood year in 2004 and we have to be careful about picking stocks and it’s more earnings-driven as opposed to liquidity driven as in 2003.
>> won’t we have the earnings to justify higher stock prices?
>> i think we will and particularly u.s. multinationals is a sector or space we like because it’s been over a decade since you’ve had a weak dollar and global growth pickup in tandem to drive. the big blue chip companies. i think that will justify some of the valuations and push earnings even higher. so i think that’s the space you want to be in and that’s why we recommend to our clients take sooff the―money off the table when it comes to the small caps and go into the quality names, typically multinationals and we like european and japanese multinationals, as well. >> although they’ll be hurt, i’m guessing, by a weaker dollar. >> they will be but remember, a lot of these companies, japanese, big european multinationals, they operate on both sides of an exchange rate so it might hurt their earnings to a degree but it won’t dampen or adversely hurt their costs. >> what is your recommended asset allocation between stocks and bonds and how do you explain to investors they should hold any bonds if they believe the army of economists and fed watchers that predict higher interest rates next year which would make today’s relatively lower yielding bonds less valuable?
>> good question. we’re telling our clients, 65% in equities and not just u.s., but international, as well. we’re recommending about 25% fixed income and i think you still have to have that part of your asset allocation because you need a hedge against geopolitical risks and inflation and you need the income-generating part of that asset allocation. we’re going to lighten up on the high yield but we still like the corporate side of the fixed income market. so as an asset class, even with the fed moving next year largely expected, we still think a lot of investors should be holding that asset.
>> by suggesting investors move more into large cap stocks instead of small cap stocks , is your prediction a reflection of the fact that the rally is hitting middle age. meaning small caps normally lead a rebound but the rebound is hitting middle age and time to move out of the quick-moving companies and the larger companies because the rally may not last much longer?
>> not that the rally can’t last longer but we’ve seen in 2003 a lot of liquidity coming off of a three-year bear market and a lot of liquidity and the high beta stocks did very well and it’s not going to repeat itself in 2004. we’re telling our clients be positioned in 2004 in the quality and if you look out to 2005, the global economy picks up steam and it goes into a second year of expansion in 2004, then the u.s. multinationals, you’re still well positioned to ride that out in 2005.
>> you like energy stocks , right at a time when saddam’s capture offers the chance of stabilizing oil prices, lower oil prices. why energy?
>> in particular, chinese. demand for the gasoline. china is just now entering the automobile revolution. they’re putting a great deal of pressure on world oil economics and we see that playing out. that’s a secular trend that will keep oil prices higher longer than most people expect.
>> joe quinlan, chief market strategist at banc of america capital management, thank you. when we return, the bank of japan will probably keep rates at zero when they meet tuesday in tokyo and some companies worry deflation might get worse next year. we’ll go live to tokyo when we return.
