January 11, 2005 10:30 AM US Eastern Timezone
Merrill Lynch Investment Managers Predicts Modest Growth in 2005; Without The Help of Tax or Fed Rate Cuts, Where Can Investors Look for Returns?
NEW YORK--(BUSINESS WIRE)--Jan. 11, 2005--The U.S. stock market and economy will continue to prosper in 2005, albeit modestly, despite a lack of fiscal and monetary stimulus in the coming year, according to Robert Doll, president and chief investment officer of Merrill Lynch Investment Managers.
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Ten Predictions for 2005
Once again, Doll offers his ten best guesses for how the economy and stock market will fare in the coming year. While he believes that stocks will go up for the third straight year, if just barely, he also thinks that the current expectations for GDP growth, corporate earnings, and the Republican legislative agenda may be too optimistic.
1. Led by a slowdown in consumer spending, U.S. real GDP growth will slow to less than 3.5%.
2. Every major economy in the world slows, but Asia continues to lead while Europe continues to lag.
3. Profits advance less than the 10% forecast as surprises are no longer positive due to slowing demand and some margin pressure.
4. Interest rates continue to move higher as the "bear flattener" takes the Fed's rate to 3.5% and drives 10-year Treasury yields to 5%.
5. U.S. stocks struggle but outperform bonds and cash for the third year in a row.
6. The average stock will underperform its index's median for the first time since 1999 as large-cap and high-quality stocks outperform small-cap and low-quality.
7. Strong balance sheets and high excess cash flow generation creates an increase in M&A activity along with dividend increases, stock buy-backs and capital spending.
8. Commodities perform well again with oil prices averaging more than $40 a barrel.
9. Optimism from Washington regarding the passing of market-friendly legislation will give way to intra- and inter-party bickering.
10. While significant structural problems remain, the U.S. federal budget deficit, trade deficit and current-account deficit will all improve for the first time in 10 years.
What's an Investor to Do?
Over the next decade, Doll continues to forecast an 8/5/2 world, where stocks will average 8%, bonds 5% and cash 2% - incidentally, very close to the final figures in 2004. Given that context, Doll recommends the following general investing guidelines for 2005:
-- Look for high-quality, dividend paying stocks.
-- Go global. Once again, there are ample opportunities in overseas stock markets where valuations are lower and the weaker dollar can enhance returns in foreign currencies when they are translated back into U.S. dollars. Overall, Doll recommends a continued overweight in international exposure in 2005 with a particular focus on Asian equities.
-- Rethink your bond portfolio. Given his forecast for increasing interest rates, Doll advocates adopting a shorter duration position in fixed income portfolios.
-- Consider commodities and other non-correlated investments. Though the easy money has been made in commodities, there is still room for profit as both China and India continue to expand and consume. Furthermore, commodities are not correlated with stocks, which is also a sound argument for including in your portfolio carefully selected alternative investments such as hedge funds or private equity funds.
-- Put cash back to work. Investors are still nervous and keeping money on the sidelines. Stocks will indeed slowdown in 2005, but they should still handily beat cash and bonds - especially if invested in low-beta companies with predictable earnings.
Merrill Lynch is one of the world's leading financial management and advisory companies, with offices in 36 countries and total client assets of approximately $1.5 trillion. As an investment bank, it is a leading global underwriter of debt and equity securities and strategic advisor to corporations, governments, institutions and individuals worldwide. Through Merrill Lynch Investment Managers, the company is one of the world's largest managers of financial assets. Firmwide assets under management total $478 billion. For more information on Merrill Lynch, please visit www.ml.com.
The opinions expressed are those of Robert Doll as of January 11, 2005 and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk.
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