NEW YORK-As volatility in the market increases, large-cap funds will come into favor, the global economy will continue to post favorable returns and the energy sector will still offer investing opportunities. This was the general market outlook for this year by presenters at the Lipper Leaders fund event here last week.
Cheap companies are expected to grow fastest in the market over the next three years, said Adriana Posada, portfolio manager of the American Beacon Large Cap Value Fund at American Beacon Advisors in Fort Worth, Texas.
Currently, companies with the lowest price/earnings ratios are large-cap blue chips, which have been out of favor in the market but have still performed well, said Don Hodges, co-portfolio manager of the Hodges Fund in Dallas.
The market overall is strong, but there may be bumps along the way over the next year, Posada said, adding that there could be further fallout in the homebuilding and housing sectors, which could creep into the home improvement sector.
Posada said that her portfolio is overweight in healthcare and consumer staples and underweight in financials, technology and telecom.
However, consumer spending may slow down due to the collapsing housing bubble and energy prices, cautioned Michael Jones, chief executive officer at Clover Capital Management of Rochester, N.Y.
Regarding large-cap stocks, Lewis Piantedosi portfolio manager of the Eaton Vance Large-Cap Growth Fund at Boston-based Eaton Vance, recognizes that they have been out of favor for a long time, and the focus has been on value stocks.
However, as the U.S. economy starts to slow, no one is sure where inflation, interest rates and the economy are heading, he said. Due to this, volatility is set to increase, and it will benefit large-cap growth investors, Piantedosi said.
He explained that value indexes are based on economical cyclical cycles and the portfolios generally consist of companies within sectors such as financials and basic industries.
Growth portfolios tend to be made up of companies within technology, healthcare and consumer stocks, he said. As the economy slows, growth companies will continue to perform well, as these sectors are not cyclical, he said.
For example, the healthcare industry will remain strong because people are not going to stop taking their prescription medicines, he noted.
"Large-cap investors should cheer the slowing economy," he said, adding that they should use volatility to their advantage and embrace it.
Investors are not placing a lot of priority on risk these days, he added. Large-cap stocks are high-quality stocks, and the more volatile the market environment becomes, the more money will flow into them, he said.
Cyclical cycles in the market are becoming less pronounced, said Shigeki Makino, chief investment officer at Putnam Investments' global core equities team. The U.S. economy has in the past been centered around service and manufacturing. Now that most of the manufacturing is done offshore, the economy is more service orientated and less cyclical, Makino said.
Analyzing the global economy, Makino speculated that it will continue to perform well, particularly global equity markets. The global economy is not as dependent on the U.S. for growth as it was in the past, he added.
Real rates, or interest rates minus the rates of inflation, remain at accommodative levels and have declined on the long end, global employment is strong, inflation is balanced and valuations are quite attractive, he observed.
Many people are focused on emerging markets, but it is not just those countries that will see growth, Makino said. The Middle East is set to spend $1 trillion on new infrastructure over the next three to five years, he noted.
Global economies are also starting to become industrialized, Makino continued. The German economy is being driven by consumption, capital spending and exports, he said. In fact, it is having favorable effects on surrounding countries such as Switzerland, Austria and the Netherlands, he said.
Kent Croft, president of Croft-Leominster Funds in Baltimore, sees opportunities in the energy sector and stated that energy assets may be significantly undervalued and should rise in value due to the low supply of oil and gas around the world.
Croft currently favors investments in Canadian oil sands and North American natural gas because of the 108 largest oil fields in the world, 47% are in decline and 77% of the world's reserves are controlled by state-owned companies that rarely align with U.S. interests, and natural gas is becoming increasingly more costly and harder to find in North America.
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