LOS ANGELES - U.S. stock market returns will be between 5% and 15% in 1996, participants in Pensions & Investments' investment outlook roundtable expect.
While the participants agreed the U.S. economy would weaken somewhat in the first half of the year before strengthening and U.S. inflation would remain low, there was no real consensus on the expected U.S. equity returns, on which sectors of the market would do best, or which foreign stock markets offered the best prospects.
The participants in the roundtable, held in Los Angeles, were Stefan Abrams, chief investment officer for asset allocation, TCW Group, Los Angeles; Robert D. Arnott, president, First Quadrant Corp., Pasadena, Calif.; Sarah H. Ketterer, portfolio manager, Hotchkis & Wiley International, Los Angeles; Lawrence S. Speidell, partner, director global systematic management and research, Nicholas-Applegate Capital Management, San Diego; and Christian Wignall, chief investment officer-equities, GT Capital Management, San Francisco.
TCW's Mr. Abrams was the most optimistic member of the roundtable on the expected U.S. market returns.
"I think corporate profits will grow 10% next year, in aggregate...and I think interest rates will be lower, so I think multiples will be flat to higher. If you have a 10% increase in overall corporate profits ...and lower interest rates, stocks ought to be up 10% to 15%," Mr. Abrams said.
At the other extreme, GT Capital's Mr. Wignall expects "low single-digit returns, at best, from the market."
Mr. Wignall noted the big earnings growth for U.S. stocks occurred in 1994, not 1995, and the year-on-year change in earnings has been slowing throughout 1995. "I think we could go down to zero growth in earnings in the first half of 1996," he said.
The other panelists expected returns on the U.S. market of about 8%.
The panelists expect the gross domestic product to grow between 2% and 3.5% in 1996, with slow growth in the first half followed by faster growth in the second half.
They also expect modest inflation, between 1.5% and 3%. "I think inflation is ceasing to be an issue in financial markets," Mr. Wignall said. "People are going to forget about it."
The participants disagreed about which sectors would perform best.
"I think growth stocks will perform better that cyclical stocks .*.*. we are obviously past the peak of housing recoveries, the peak in car sales, all these traditional elements," said Mr. Wignall. "They are very mature now. So I think growth led by new industries, long-term growth businesses, wherever they may be, will continue to lead the market."
Ms. Ketterer had a different opinion: "We are expecting good performance out of the utility sectors, autos and basic industries such as chemicals and paper stocks, perhaps oils, and selected financials and selected health care."
First Quadrant's Mr. Arnott said his firm had "a large-stock growth bia...Our 10 largest holdings are a roster of high-quality blue chips, which is very unusual for us."
"We are not great fans of the large 'safe growth stocks'*" said Nicholas-Applegate's Mr. Speidell, "but we are fans of growth stocks; and we believe you have to find it wherever it lurks." Mr. Speidell said his firm found interesting stocks in some of the growth cyclical areas, and even technology.
Mr. Abrams said he believes the most inefficiently valued sector of the market is the midcap sector -$500 million to $2 billion in market capitalization. The second most attractive area is still the small-cap area, he said.In international investing, the participants generally liked the emerging markets better than the established markets, with Mexico and Japan being particularly favored by most of them.
The one objector to Japan was Ms. Ketterer, who cited the country's strong resistance to restructuring as a negative. Ms. Ketterer noted Toyota Motor Corp. now employs more workers worldwide than it had at the peak of its production in 1991.
A full transcript of the panel's views on these and other subjects begins on this page.