Doll, Pace Forecast Economic Recovery
July 19, 2010
Despite investor concerns about a global economic recovery, BlackRock's Bob Doll and Deutsche Bank's Ben Pace are optimistic.
The vice chairman at BlackRock said that though the economic recovery hit a stumbling block in the first half this year, he is confident it can overcome that obstacle by sticking with risk assets, high-quality equity and higher-yielding assets like corporate bonds.
According to the Bank of America Merrill Lynch Survey of Fund Managers for July, released Tuesday, 12% of respondents expected the global economy to deteriorate in the next year, compared with June's results when 24% forecast the economy to strengthen. July's results were the first negative forecast since February 2009.
In BlackRock's third-quarter investment outlook, Doll said investors should invest in high-quality equities in the current environment. This echoed the sentiment of the majority of speakers at the Morningstar 2010 Investment Conference in Chicago last month, whose overriding message largely was: Buy U.S. blue-chip stocks.
At a media presentation by Deutsche Bank Private Wealth Management on the ultra high-net-worth market at the bank's Park Avenue headquarters last week, Chief Investment Officer Benjamin A. Pace III said it has become challenging to convince wealthy individuals and large institutional investors to take advantage of what will certainly be double-digit growth in the equities markets by year-end - should the S&P 500 hit DB's consensus target of 1235. The index closed at 1095 on Wednesday, July 14.
For now, those Deutsche Bank clients who are uncomfortable with equity volatility are moving their money into money market funds and custom DB principal-protected products that guarantee a floor on their investments. One product that has been particularly popular is the Deustche Bank Core Equity S&P 500 Fund.
Pace and his team are telling clients with slightly higher risk tolerance to move 4% to 7% of their portfolios into emerging market currencies in the BRIC (Brazil, Russia, India and China) regions, as well as to stick with municipal bonds and Treasuries.
"We have hit a patch of soft economic growth, but we don't expect a double dip," Pace said. Instead, GDP growth may level off into some sort of a "square root where the U.S. economy levels off at a growth rate lower than potential worldwide growth, with a proliferation of pullbacks."
Pace said this is because a "financially induced recovery is typically weaker than a classical consumer products boom and bust-'We're off to the races' type of recovery."
In fact, one of Deustche Bank's economists in Frankfurt predicts the recovery could end up looking like a "'Sign Wave' of mini cycles," Pace said.
BlackRock's Doll agrees with the Global Investment Solutions-U.S. team at Deustche Bank that the economic recovery will occur later this year, in some shape or form - but hopefully not a "W" double-dip.
Doll and his team are telling clients that when the recovery finally kicks in, cyclical stocks that have been hit hardest by the recent ups and downs will outperform.
In terms of specific sectors, BlackRock favors telecommunications services, and has upgraded its outlook on the consumer discretionary to slightly overweight, and the utilities sector to neutral. Broadly speaking, Doll recommends being underweight on financials, but he did note that the sector is making slow improvements. For the time being, energy stocks look less appealing.
Doll's view is largely unchanged from his January prediction for 2010, when he said U.S. stocks would outperform cash. Known for a track record of successfully predicting market movements (11 of his 12 predictions for 2009 were correct, according to press reports) he oversees about $3.2 billion in assets at BlackRock, the world's largest asset manager.
He co-authored the report with Curtis Arledge, a BlackRock managing director and chief investment officer of fixed income and fundamental portfolios. Arledge weighed in on the fixed-income assets, saying spread assets should perform well as investors look for higher-yielding investments.
Although some money has been moving out of mortgage-backed securities to other attractive spread asset sectors, BlackRock MBS from participants other than the so-called agency issuers Fannie Mae, Freddie Mac and Ginnie Mae. Spreads on some higher-quality corporate debt bonds had widened over the quarter, making them more compelling buys than Treasury sectors or agency MBS. BlackRock's stance on that sector went to neutral from slightly underweight.
Among municipal bonds, Arledge says BlackRock has a neutral stance on the sector, because absolute yields are low and local governments have not been able to increase revenues.
Doll is not being flippant when he sums up the structural concerns in the U.S. economy and the potential contagion from the European sovereign debt crisis as a roadblock. He acknowledges the bearish market view that says renewed credit concerns will overwhelm a global financial system that is already fragile, and that long-term threats of high inflation, big deficits and rising tax levels will intensify as time passes. All of this is pointing toward a bear equity market.
He adds, though, that markets dislike uncertainty, which is exactly what is driving volatility in the equity markets. Once the economic recovery becomes firmly in place and the European debt situation becomes clearer, investors will focus on fundamentals again.