Optimism for International, Value in 07: Columbia Investment Execs Present 2007 Outlook
November 27, 2006
International and value stocks are poised to do well in the coming year, while growth stocks will continue this year's flat path. This is according to Columbia Management's 2007 Outlook webcast last week.
The long-term outlook on international stocks is positive for a few reasons, said Fred Copper, head of international equity sales at the Boston-based investment management arm of Bank of America. The global gross domestic product (GDP) rate is slowing, but the rate is still above trend and at a sustainable, robust level, he said.
Inflation pressures are limited by outsourcing and competition for products, which are keeping the lid on prices, Copper said. Also, despite recent increases, global interest rates are still accommodative, he said.
Investors should consider having international stocks in their portfolio, Columbia believes. More than half of the market capitalization is held outside the U.S., Copper noted. "There are tremendous investment opportunities in [international stocks], and most investors investment allocations don't reflect that," he said. Some of the biggest and most recognized companies operate outside the U.S., he said.
One way of achieving a diversified portfolio with international stocks is through mutual funds; international stocks are accessed well through mutual funds and they are a low-cost option, Copper said.
U.S. and China are the key drivers of global growth, said Laura Ostrander, one of three portfolio managers of the fixed income Columbia Strategic Income Fund. Investors should consider a diversified portfolio across countries and currencies. BRICK countries, which include Brazil, Russia, India, China and South Korea, will be drivers of growth in the market, Copper said.
"The international market for equity and fixed income stocks presents vast opportunities for investors," Ostrander noted.
The dollar is continuing to decline, and the cycle usually lasts for seven to eight years. It began in 2002, and the steepest decline was seen in 2002 to 2004, against the euro and the pound, Ostrander said. What is left to decline will be seen against Asian currencies, and the continuing weakening of the dollar may help global investors, she said.
However, the outlook for international stocks over the next few months warrants some caution from investors, according to Copper. Markets around the world have reached new highs despite interest rates rising, and the effects of GDP rates slowing have not been visible in earnings reports thus far. "The market has to go through its digestive stage, and the impact of the slowing growth will be felt at some point," he warned.
Value stocks will do well in the market over the next year, as well, said Diane Sobin, managing director and senior portfolio manager on the value strategies team at Columbia. There are mid to late economic cycle opportunities, she said. Also, value stocks are attractively priced and offer sound profit margin opportunity.
Sobin said she looks for companies that have good values with the potential to improve. Many times, investors tend to look at the cheapest part of the market to invest, but that usually increases risk, she said.
In looking for strong value opportunities, Sobin examines a company's business operations and tracks its growth, expecting it to deliver higher value, returns, profit margins and market share every one to three years.
Investors should also consider value companies that prove they have benefited from capital spending and have a presence both in the U.S. and abroad, she continued. Companies that may have temporary weaknesses with the potential to recover, such as consumer products and beverage bottlers, may also be a good investment, Sobin said
On the other hand, Columbia investment executives have low expectations for growth stocks in the coming year. This is despite growth stock valuations being attractive and companies reporting better than expected earnings in the last quarter, said Paul Berlinguet, senior vice president and head of growth strategies at Columbia.
Relative valuations for growth versus value are at all-time lows, Berlinguet admitted, and next year's profit growth is predicted to be substantially higher for growth stocks in all capitalizations-large, mid and small.
Nonetheless, he said, his "expectations remain low." Investors looking at growth in the coming year should consider companies' "pricing power, plans to keep costs down, strong return potential on invested capital and all-weather business models."
Fixed income stocks might also show some promise in the coming year, said Marie Schofield, senior fixed income portfolio strategist. The Federal Reserve has put increases on interest rates on hold, and long-term rates are expected to remain in range, she said-"unless inflation increases or growth does not slow enough, which are two risks that go hand in hand."
Another potential drawback could be falling housing prices curtailing consumer spending. Schofield expects growth to moderate enough by the second half of next year to allow the Fed to ease and let rates fall.
Credit spreads will probably remain tight in the first half of next year as fundamentals are strong. However, valuations are extended and returns are not expected to be generous. Fixed income investors in the coming year may want to diversify across fixed income sectors and focus on higher-quality fixed income instruments.
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