NEW YORK-Despite the current slowdown in Asian, Latin American and Russian markets, the United States has taken a commanding lead in industries most important to the global economy during the next several decades: communications equipment, computer hardware and software, biotechnology and health care, retailing and financial services.
That was the rosy, big picture conclusion of five economists and investment strategists who spoke last week at a New York Society of Security Analysts seminar titled, “Market Forecast-U.S. Stock Market, Eagle or Bubble?”
“We are on the verge of a synchronized worldwide economic expansion … and Japan is the most interesting market to watch for recovery over the next two-to-three years,” said Michael Metz, managing director of CIBC Oppenheimer Corp.
Asked about the outlook for Brazil, another major market for American companies, Richard B. Hoey, chief economist of The Dreyfus Corp., answered this way.
“Brazil had a major political problem caused by a losing politician who pulled the financial plug,” he said.
“It is in a severe recession and the rebound is shaky, but the fever has broken and the worst is past.”
As for the former Soviet Union, Joseph V. Battipaglia, chief strategist for Gruntal & Co. L.L.C., characterized the market opportunity there as uncertain and limited.
“Russia’s economy is in as bad a shape as Somalia’s, but we (the U.S. government) will give them tens of billions of dollars because they have nuclear arms. As we destroy those, Russia will become less important to us.”
Almost irrespective of external economic conditions, the domestic marketplace seems to be continuing growth at a sustained clip. However, unforeseen events like a trade war, currency war or outright war on a massive scale could turn a bull market into a bear market, said Edward S. Hyman, chairman of both ISI Group Inc., a broker dealer, and ISI Inc., a mutual funds management company.
“We are supposed to divine what will happen tomorrow, but change is coming faster than ever before. I look at how U.S. companies are dealing with two cataclysmic events. The negative is that the Asian economies have lost their wheels. The positive is the Internet,” Battipaglia said.
“We need macho managers because corporate leaders have to go into his ‘Brave New World’ and slice out a piece of it for themselves.”
The other dark cloud in this otherwise sunny sky is the risk that the ongoing transfer of capital from poor to rich and from labor to capital in the United States eventually will cause a massive populist uprising against this inequity in wealth distribution, Hyman said.
On the other hand, Battipaglia countered, “for the first time in this country, there is a shareholder class, and they are making themselves heard at the voting booth.”
The excess capital generated by a rising stock market in an era of restrained inflation, which is caused by “global pressures in Asia and Latin America,” means plenty of available money for investment in new and growing business enterprises, said Philip J. Orlando, chief investment officer of Value Line Asset Management. This scenario works well as long as the growth in available capital exceeds overall economic growth, as is now the case.
At the same time, investors run the risk of being misled by inflated projections given out by some companies during this exuberant market, Hoey said.
“The quality of the relationship between reported numbers and underlying strengths is diminishing in a bull market. Every so often, you hear about a company’s disagreement with its auditors, and its stock price drops by 80 (percent) to 90 percent,” he said.
Another subterfuge that has become commonplace is the use of extraordinary write-offs for closing an unsuccessful business unit, Hoey added.
“If you have to close an unsuccessful business more than once every 10 years, I would suggest you are not accounting properly.”
Counter-balancing these risks to investors are some positive factors, Battipaglia said. Among these is low inflation, which results in low interest rates and justifies high price-to-earnings ratios, representing the relationship between a company’s stock share price and its earnings.
“Despite the over valuation of the S&P 500, hundreds of companies are cheaper public than they would be if privately held,” Metz said.
“I would shop in the smaller cap universe.”
Battipaglia also said investors must bear in mind that the traditional Industrial Revolution model for assigning valuations to companies based on tangible assets works to understate the worth of both high-technology companies and those in other sectors taking advantage of advanced technologies.
“Technology smooths out the peaks and valleys of the business cycle through point-of-sale systems, etc., so businesses have a much better sense of demand and there is a better match between supply and demand,” he said.
Battipaglia said he likes large technology companies like MicroSoft Corp., Lucent Technologies Inc., Nortel and Texas Instruments.
Using recent history as a guide, Hoey countered, it would be a mistake to assume the successful major growth companies of today will be the major growth companies of tomorrow.
“What’s popular is not cheap, and what’s cheap is not popular, but I believe we are at the transition point where it pays to buy what’s cheap,” he said.
