Zero!
That's the total return Peter Anderson, senior vice president, investment operations at American Express Financial Advisors Inc., Minneapolis, expects from the U.S. equity market in 1998.
The other participants in Pensions & Investments' Investment Outlook Roundtable were more optimistic, projecting from high single-digit returns to almost 20%.
The other participants were Gary L. Bergstrom, president, Acadian Asset Management, Boston; Alan B. Bond, Bond Procope Growth Equity Management, New York; John Y. Kim, president and chief investment officer, Aeltus Investment Management, Hartford, Conn.; and James M. Weiss, deputy chief investment officer, State Street Research & Management, Boston.
Noting that all of the participants in the roundtable expect a 1998 return lower than in 1997, Mr. Anderson said: "That implies to me that you are really going to have to focus on stock selection; the market is not going to carry you in a major way."
The highest return expectation for 1998 was that of Mr. Bond, who projected a return of between 15% and 20%.
Mr. Bond said individuals are continuing to pour money into the stock market, companies are buying back their stocks, and the wave of consolidations is continuing.
"As long as I see that, I am encouraged," he said.
Acadian's Mr. Bergstrom projected "high single-digit" returns. He said a lot of the overvaluation of the market is concentrated in the big multinational corporations.
"Our view is that the better opportunities, both in a valuation sense and growth sense, tend to be concentrated down at the lower end of the capitalization spectrum as opposed to the higher end," he said.
Aeltus' Mr. Kim projected low double-digit returns, based on corporate earnings growth in the 8% to 10% range, a 1.6% dividend yield, and no expansion in price/earnings multiples.
"The big watchout for me," he said, "is Fed policy. If the domestic economy heats up and the Fed is forced to tighten, I think that could rain on the party fairly severely, and that's my biggest concern."
State Street Research's Mr. Weiss projected total returns of about 9%, based on a 7% growth in corporate profits in 1998, p/e ratios staying where they are, and continued cash flows from individuals, corporate buybacks and non-U.S. investors fleeing the Asian market problems.
Mr. Weiss said a significant portion of the money that has flowed into mutual funds in the past six or seven years stemmed from the substitution of mutual fund ownership for direct ownership of stocks. At some point, the substitution cash flow will run out, he said, and that might make it appear individual investors are pulling back when they might not be.
Asked where they would focus investment attention in 1998, the panelists unanimously said large-cap stocks would not offer the best returns.
Mr. Anderson said the cheapest sector in the large-cap area is technology, but it is cheap because of the earnings volatility. He said he liked financial stocks and that small-cap growth is modestly undervalued relative to the general market.
Mr. Bergstrom said there aren't such bad values in some of the midcap and smaller cap companies.
Mr. Bond said that because of the merger and acquisition wave, "I would have to say there is still attractive value out there. Our focus is much more finding and identifying the growthier names."
Mr. Weiss said 1998 could be tough for value stocks.
