Merrill bearish on 2003
Economists stress caution
By Steve Gelsi, CBS.MarketWatch.com
Last Update: 2:28 PM ET Jan. 14, 2003
NEW YORK (CBS.MW) - The U.S. economy may grow slightly in 2003, but recent stock buyers are anticipating a boost that's not likely to materialize as geopolitical woes and slowing consumer spending persist throughout the new year, analysts at Merrill Lynch said Tuesday.
"2003 will echo the Chinese calendar, the year of the sheep," said David Rosenberg, chief economist for Merrill. "We're sheepish on the economy."
Meeting with reporters to provide an annual economic outlook, Rosenberg was joined by Richard Bernstein, chief U.S. strategist, and Martin Mauro, manager of private client fixed income research.
Still skeptical on equities
Bernstein reiterated Merrill's December view to trim equity holdings to 45 percent from 50 percent. He dismissed recent gains in the Nasdaq and "speculative" stocks as a seasonal "January effect" and not the start of any major upsurge in beaten down tech stocks for the year.
Despite crushing losses over the past three years, the "riskiest stocks still sell at a higher valuation," meanwhile, "safe stocks are still cheap," Bernstein said
Recent market gains are feeding off of optimism that the economy will boom once an expected war with Iraq passes in the second quarter, but Bernstein maintains the geopolitical woes that surfaced after Sept. 11 may persist for the next five- to ten years.
He highlighted stocks with dividends, not only because of the expected tax cut proposed by the Bush administration on income from dividends, but because they provide consistent yields over time.
With Baby Boomers reaching retirement age, the time is running out for investors to wait for long-term gains in stocks. Shifting to dividend-paying stocks now could allow investors to start ringing up returns ahead of the pack.
Best of a bad lot
Bernstein said energy stocks would remain hot for years to come, as rising demand may be harder to meet with the industry's aging infrastructure.
Overall, Merrill continues to take a "back-to-basics approach" to investing in key sectors such as consumer staples, selected utilities, aerospace, defense and major pharmaceuticals.
Mixed macro messages
Rosenberg said gross domestic product would likely grow 2.5 percent in 2003, about flat with 2002 levels. Unemployment is expected to grow to 6.5 percent, up from 6 percent. Consumer spending, which has driven the economy, is expected to grow at a rate of about 2.4 percent, lower than GDP growth for the first time since 1991.
The dollar is likely to continue its fall against other currencies, but it's not expected to have a drastic impact. Merrill sees the dollar falling to $1.12 on the euro, on top of a 13 percent fall in 2002.
The unemployment rate and inflated home prices may start to take the wind out of consumer spending. Businesses may increase capital spending, but only as a way to avoid hiring more people.
He noted that after the Gulf War in 1991, the economy began to turn around, but it took a couple of years before it shifted into high gear. Forecasts of a swift victory in Iraq and a boom shortly after will not come true based on past history, he said.
Mauro said investors should take credit risk selectively via coupon income and back away from interest-rate risk. Municipal securities, and mortgage-based securities have appeal, he said.
Steve Gelsi is a reporter for CBS.MarketWatch.com in New York.
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