The investment chiefs at the world's top money management firms say the global and U.S. economies and stock markets are in for recoveries in 2002, but that's about the extent of their agreement.
They hold divergent views on the speed and strength of economic recovery, on how well stocks will rebound, on which stocks will lead the charge and on whether inflation will return before the year's end.
Joseph J. McAlinden, chief investment officer at Morgan Stanley Investment Management, New York, is among the most bullish on 2002. He predicts 30% growth for the Nasdaq composite, a 20% gain for the Standard & Poor's 500 stock index, an increase of 3.5% in the U.S. gross domestic product, and a sharp, strong economic upturn early in the year.
"This (U.S.) economy is going to rebound, and do so quickly," said Mr. McAlinden, whose company manages $451 billion in assets.
Grove Street Advisors' Clinton P. Harris agreed, saying the U.S. economy could turn around as soon as the second quarter. And when the upturn comes, he said, it could be very strong.
Mr. Harris, managing partner at the Wellesley, Mass., firm, said the technology recession has lowered inventories, setting the stage for high demand. Although it won't be another Internet bubble, he does expect to see growth in some high-tech sectors.
The economy already has turned the corner, argued Gail P. Seneca, managing partner at Seneca Capital Management, San Francisco, and the time to get into healthcare and technology stocks is now. Among her favorite bets for 2002 are Baxter International Inc. and Intel Corp.
Although still "mildly bullish," William F. "Ted" Truscott has a slightly more pessimistic viewpoint. The CIO of American Express Financial Advisors, Minneapolis, with $234 billion in assets, said things will get a little worse before they start getting better for the domestic economy and the stock market. And even when things do start improving, they won't be anything like the 1990s, said Mr. Truscott.
Equity returns will be closer to historical norms - in the high single digits - and the GDP will grow at a rate closer to 3%, he predicted. The problem, Mr. Truscott said, is that even when the recovery gets under way, "there is still a lot of excess capacity out there that is not being utilized." Additionally, consumers "can't continue to spend the way they have in the past."
Further equity upturn
The markets' recent upswing means investors already are anticipating a third-quarter 2002 recovery, said Eddie C. Brown, CIO at Brown Capital Management, Baltimore. He predicts a further upturn in equity markets, but nothing spectacular. However, any growth at this point would be better than 2001, when stock markets danced to a "one step forward and three steps backward" routine, Mr. Brown said. In 2002, he expects "three steps forward and one step back," with overall market returns between 8% and 10%.
Similarly, TCW Group Inc.'s Doug Foreman said although equity markets will recover in 2002, it won't be a boom year. The economy isn't likely to show signs of strength until spring, and when it does, it will be more of a stabilization period characterized by growth in the capital goods, manufacturing and technology sectors.
In general, most CIOs are cautiously optimistic about stocks in 2002. The majority interviewed by Pensions & Investments said they believe domestic equities will provide returns in the high single digits. Whether those returns will be led by value or growth, small-cap or midcap stocks, however, is anyone's guess.
Randy Merk, CIO at American Century Investments, Kansas City, Mo., makes the case for large-cap value stocks. Although value stocks have been somewhat overvalued for the past 18 months, he said, "I think large-cap value funds may still have their day. We've already begun to see a shift from small-cap value to midcap; I think large-cap will follow." American Century has $82 billion in assets under management.
Not so, said Howard Wohl, co-founder and CIO at fund-of-hedge-funds firm Ivy Asset Management Corp., Garden City, N.Y. - large-cap growth stocks are poised to outperform value stocks. Large-cap growth, Mr. Wohl said, tends to lead the way in economic and stock market recoveries. Ivy, with about $5 billion in assets, typically specializes in smaller-cap stocks, including biomedical, financial and media companies.
Robert C. Doll, president and CIO at Merrill Lynch Investment Managers, Princeton, N.J., said he thinks small-cap and midcap growth stocks are the way to go.
But ask Kevin Parke, CIO at MFS Investment Management, Boston, and he'll tell you value will win out over growth in 2002, as large technology and telecom companies will continue to weigh down the growth market.
At Sit Investment Associates Inc., Minneapolis, CIO Gene Sit likes small-cap growth stocks because, he said, current market valuations favor those stocks.
Then there are those who think both value and growth will have their place in the sun in 2002. Among them is Alan Brown, CIO at State Street Global Advisors, Boston, who thinks value stocks will outperform growth early in the year but then fall behind as the economic recovery revs up. Additionally, he said, small-cap companies will outperform large caps because small caps tend to have a larger exposure to the U.S. economy, which will lead the world out of recession.
Morgan Stanley's Mr. McAlinden sees the opposite scenario playing out. Growth stocks will outperform value stocks early in the year, he predicted, then yield to superior value performance in the second and third quarters. In line with Mr. Brown, Mr. McAlinden also sees small-cap and midcap stocks doing better than large-cap stocks in 2002.
In fixed income, several CIOs said they liked Treasuries and government agencies in 2002, and said corporate bonds and emerging markets also hold promise.
The next U.S. Federal Reserve Board move likely will be a rate increase, but the Fed is finished tinkering with interest rates until manufacturing picks up in 12 to 15 months, said William H. Gross, CIO of Pacific Investment Management Co., Newport Beach, Calif.
The relatively low, flat rates will affect many segments of the bond market, he said.
"I'm not suggesting that we're entering a bear bond market, but rather a 12-month period where yield, or spread, will be making the difference," Mr. Gross said. "In this context, sectors such as emerging markets and corporates begin to look good, but I believe lower-quality junk will continue to have its problems in 2002."
American Century's Mr. Merk said his company is recommending that clients stick to high credit quality, meaning Treasuries, agencies and high-quality corporates and municipals.
Biased on Treasuries
On the long-term side, Cynthia R. Plouche, CIO at Abacus Financial Group, Inc., Chicago, agreed, saying she is biased toward Treasuries and government agencies.
For short- and intermediate-term bonds, Ms. Plouche said, she likes corporate bonds and mortgage-backed securities.
Both Jeffrey Diermeier, CIO at UBS Asset Management in Chicago, and Stuart Schweitzer, global investment strategist at J.P. Morgan Fleming Asset Management, New York, said they recommend positioning fixed-income portfolios for slightly longer than normal durations.
Mr. Diermeier said while rates most likely have bottomed, increased market turbulence is creating pockets of opportunity along the yield curve.
Credit spreads will narrow in all fixed-income areas as the year progresses, Mr. Schweitzer predicted, and corporate bonds will outperform other styles.
"There will be increased rewards (for) risk-taking in 2002," Mr. Schweitzer said.
Stephen Oristaglio, senior managing director and deputy head of investments at Putnam Investments, Boston, said high-yield bonds are the place to be in 2002, as they are poised to outperform equities. He compared the economic situation now to the recession of 1991-`92. When recovery got under way then, high-yield bonds took off, returning nearly 40%. This time around, he expects returns in the 14% to 25% range.
No inflation worries
Few CIOs said they see inflation as a concern in 2002. At the earliest, they said, inflation may reappear in 2003.
Blake R. Grossman, CIO at Barclays Global Investors, San Francisco, said lower energy costs, weakened prices for raw materials and softening labor costs should keep inflation in check.
Internationally focused investment managers like what they see in European and emerging markets countries this year. Thomas W. Jones, chairman and chief executive officer of Citigroup Asset Management, New York, said U.K. and European economies are poised to recover more quickly than the U.S. economy because the United Kingdom and Europe were "less extended at the end of the boom cycle and had not reached the same rates of growth as in the U.S."
Similarly, U.K. and European stocks are poised to outperform U.S. equities because those markets didn't go to the same extremes as the U.S. market, said Mr. Jones, whose company manages $400 billion in assets.
At London-based Deutsche Asset Management, chief global strategist Adam Seitchik said he thinks commodities, consumer cyclicals, capital goods and cyclical parts of the technology industry will lead a European economic recovery later this year. He said he expects eurozone countries and emerging markets to be the best performing markets.
"The eurozone tends to be a more cyclical market in terms of the nature of stocks and the investor base," Mr. Seitchik said. He added that European investors tend to be more skittish and are likely to move quickly into cyclical stocks, pushing prices higher.
He is also bullish on the prospects for emerging markets, which he calls "the ultimate cyclical asset class."
"The best time for them (emerging markets) is usually when international interest rates are bottoming and we are emerging from recession," Mr. Seitchik said.
Looking to Europe
Gary Motyl, CIO at Templeton Institutional Group, Fort Lauderdale, Fla., agreed that Europe is a good place to look for early signs of global economic recovery. On the other hand, Japan will get little bounce from the world's economic rebound, he said.
"We've been negative on Japan for 10 years," Mr. Motyl said. "I think they will have a modest recovery this year, but the situation there will still be difficult because of the structural problems in the economy."
He cautioned that his Japanese outlook could change "overnight" if the government there implements significant policy changes.
Angelien Kemna, global chief investment officer at ING Investment Management, The Hague, Netherlands, is betting the economies of Australia and the U.K. will be the strongest performers in 2002. The U.K. economy, she said, has withstood the depths of the global recession and its manufacturing sector is well-placed to benefit from a global economic recovery.
But don't expect the U.K. market to outperform the U.S. market in 2002, she warned, as the telecommunications and technology sectors will lead global stock market gains this year. Singapore and South Korea, with their high exposure to tech stocks, should be the world's best-performing stock markets, even ahead of the United States.
In the United States, economic recovery should become evident by the latter half of the year, Ms. Kemna predicted, and unemployment, which she expects to hit a high of 6.5% mid-year, should be around 3.5% by December.
The slow economy early in 2002 may hinder real estate investments, said Lynn Thurber, chief executive officer of Chicago-based LaSalle Investment Management Inc.
"But if there is a bright spot, it's that everyone is coming to grips with the bearish news and planning for a slow, soft first half," she said. "Our outlook in general is that real estate in pension fund portfolios will do what it's supposed to do: provide good cash flow, current income and diversification from other asset classes."