The economic recovery is tepid. A huge overhang of unsold houses still crimps new construction. Unemployment will remain well above 8 percent next year. Europe verges on panic. Nevertheless, high-ranking analysts, portfolio managers, and economists at T. Rowe Price are gamely finding reasons for investors to be optimistic.
At least, a little optimistic. That is, in limited sectors like consumer durables, technology, emerging markets, and even such apparent deadbeats as Greek bonds and mortgage-backed securities.
“We’re appraising the market with caution,” said Larry Puglia, manager of the firm’s Blue Chip Growth Fund, at a recent briefing for investors and reporters. Noting that all postwar, post-downturn bull markets have run more than two years, he added, “If we have a typical market recovery, it could persist a bit longer.”
It’s crystal ball time on Wall Street again, an annual holiday tradition in which financial industry gurus bring out their year-end briefings on next year’s investment outlook. This is the second in a series attended by Institutional Investor.
Overall, the message from the seven T. Rowe Price financial experts seemed to be: Things aren’t great but they could be worse. For instance, chief economist Alan Levenson noted, “Residential construction is no longer a drag on growth but likely will make only a modest contribution over the next year.” And William Stromberg, director of the firm’s global equity research, predicted that there would be no double-dip recession nor “a serious risk of deflation,” but that recovery would be slower than typical after a downturn.
So the experts, all from different sectors, poked around their specialties to find niches of opportunity.
Puglia, the blue-chip equities manager, singled out consumer durables and technology companies, followed by large-cap multinationals and growth stocks, as the best potential plays. He and Stromberg also emphasized corporate capital spending, but for different reasons. While Stromberg called it “the only sector growing faster than the overall economy,” Puglia noted that it was still below historic levels as a share of gross cash flow. Thus, he said, “There’s plenty of potential stimulus for earnings.”
Fixed income is supposed to be the non-risky part of the asset mix, but it was bond manager Steven Huber who went out on some surprising limbs. He called Greece “a nice buy opportunity” and recommended mortgage-backed bonds as “steady” and providing diversification – but only those backed by federal agencies. He also suggested inflation-protected bonds in particular emerging markets, such as Brazil. All that, however, was in the context of warning that “it’s going to be hard to make the case that any of these sectors is going to have 10 percent returns.”
And if markets are going to be volatile, the whole crew seemed to say, then make volatility lemonade. Or, as Huber put it, “Volatility is our friend.”
Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.
