Quantitative Management Associates LLC, Newark, N.J., is raising the weighting of its U.S. equity allocation in its portfolios to as much as 70%, boosted by a forecast of a rapidly accelerating GDP that could lead the Standard & Poor's 500 to rise 12% in total return next year, said Edward F. Keon, managing director and portfolio manager.
The expected market return is driven by Mr. Keon's forecast of a U.S. gross domestic product gain next year of 5% in real terms after inflation and continuing in 2015. That gain will trigger corporate earnings growth of at least 7% to 12%, Mr. Keon said in an interview.
His projected rate is more than double recent GDP growth.
Mr. Keon estimates GDP for the second quarter, ending June 30, will post a gain in the 1.5% to 2% range annualized after adjusting for inflation. For the first quarter, GDP was an annualized real 2.4%, Mr. Keon said.
“I don't have a particular price target” for the S&P 500 for 2014, Mr. Keon said. ”We should expect for the next couple of years (the S&P 500 return) to be roughly equal to the earnings growth of 7% to 12% range.”
The S&P 500 has a total return of 15.1% year to date through June 11
“My guess it will do better than 15% for the entire year,” Mr. Keon said, adding he doesn't have a particular target.
The rise in equity prices in the U.S. and many global markets — “is quite real, and this bull market is likely to have a way to go,” Mr. Keon wrote in a June analysis, “2013 Mid-Year: Turbulent Teens”
“We think the U.S. equity market in particular is anticipating much more robust economic growth than most expect over the next few years, driving higher profits and equity prices,” he wrote in the analysis.
In accord with that outlook, Mr. Keon said in the interview, “We are pretty heavily overweighted equities” and have been for a couple of years. QMA, a unit of Prudential Financial Inc., has let the allocation grow with the market's rise rather than pull back by rebalancing.
“We have higher allocations to equities than we had at the beginning of the year,” Mr., Keon said. The allocation depends on the QMA strategy and client mandate, he added.
QMA, which runs $90 billion, including $50 billion in asset allocation portfolios, has a 65% to 70% equity allocation now in asset allocation portfolios that track a 60% equity/40% fixed income benchmark, Mr. Keon said. At the beginning of the year, the allocation ranged from 63% to 67%, Mr. Keon added.
The asset allocation portfolios hold U.S. and international equities, fixed income, commodities and hedge funds.
“The 70% is pretty aggressive, “Mr. Keon said. “I wouldn't expect it to get too much higher.”
He expects U.S. equities to outperform international equities over the next couple of years at least.
For international equities, QMA is equal or underweighted, compared with the benchmarks, Mr. Keon said.
In fixed income, QMA is overweight corporate securities, both investment grade and high yield, and underweight government securities, Mr. Keon said.
“It's possible our outlook for faster growth for the economy and earnings won't pan out,” Mr. Keon said. “We don't expect much growth” for the rest of this year. “But we expect it to accelerate toward the end of the year and as we go through 2014.”
In terms of the federal fiscal policy's impact on the market, Mr. Keon expects the “fiscal drag to fade in 2014.”
“We don't expect higher taxes or more spending cuts,” either of which could dampen growth, Mr. Keon said.
“Inflation is likely to remain fairly low,” Mr. Keon added, saying it now is about 1%.
The Federal Reserve inflation “target is around 2%,' Mr. Keon said. “If my call (on the 2014 outlook) is right, inflation will pick up a little,” to 2% for later this year and 2014.
“The international arena has been a source of uncertainty,” Mr. Keon said, citing debt problems in Greece and Cyprus, among other countries. “We think the problem will get better rather than worse.”
“Japan is trying a dramatic shift in policy,” monetary, fiscal and regulatory, Mr. Keon said. “My belief is it will get better."
