It will be harder for advisors and money managers to outperform this year after a strong 2009, but there are still a few key areas of opportunity, Larry Adam, the chief investment strategist for Deutsche Bank Private Wealth Management, said during a conference call Wednesday.
He said that last year fixed income mutual fund managers posted their best out performance relative to the Lehman Aggregate Index since at least 2000, outperforming by 10% on average. If managers took any sort of credit risk, and invested in bonds with less than an A rating, they significantly outperformed, “but the risk trade is over,” Adam said. Small and large cap equity mutual funds also outperformed.
This year, managers will have to work harder to prove their value, he said. Adam recommended focusing on sectors with overseas exposure, as U.S. companies currently get approximately 40% of their profits from overseas and, with a weak dollar, U.S. goods should be more attractive in foreign markets.
In particular he recommended energy, technology, health care and consumer staples stocks, as he believes the market is underestimating earnings growth in these sectors.
On the other hand, he said that the market is overestimating the earnings growth potential in financials and consumer discretionary stocks.
Adam also suggested that managers take another look at dividend-paying stocks. While dividends were cut at a record pace in 2008 and 2009, he predicted dividend payments will increase at least 2% in the Standar & Poor's 500 Composite Index this year.
He said U.S. companies have a combined $1 trillion in cash on their balance sheets and payout ratios are at historically low levels. Companies are also likely to give a one-off cash payment this year as the tax on dividends may increase in 2011, he added.
For yield-seeking investors, Adam recommended looking at companies whose dividend yield after tax is in excess of their corporate bond yield after tax, and said there are 117 companies in the S&P 500 that fit that criteria.
Then the question for investors becomes: “Do I want to invest in stocks where dividends might have some growth or do I want to invest in a bond where there’s an interest rate risk?” he said. These companies are primarily in the consumer staples, industrials and utilities sectors.
However, Adam was less bullish on gold’s prospects, predicting that oil would outperform gold this year. Since gold demand bottomed in the second quarter of last year, Adam said gold prices have risen 21%, while oil prices are relatively unchanged. This is despite the fact that physical demand for gold has dropped 1% over the past decade while the demand for oil has grown by 9%.
Adam predicted gold will end the year at $1200/ounce, while oil will reach $90 a barrel.