BRYAN
01-09-2005, 06:08 AM
A single-digit stock market
Experts expect equities to rise by less than 10 percent in 2005
By Ben White
Washington Post
First, the case against stocks in 2005: The bull market that began in October 2002 is getting old. The United States is running huge trade and budget deficits. The dollar continues to fall. Corporate profit growth is slowing. Iraq is a mess.
Second, the case in favor: Oil prices have eased somewhat. Inflation and interest rates remain low. The economy, while choppy, keeps chugging along. Companies are flush with cash. Wall Street is humming with merger and acquisition activity.
What is the individual investor to make of all this?
Will 2005 bring robust across-the-board stock market gains, making index funds a safe bet? Or is it time to hunker down with bonds, cash and a few well-picked stocks?
Depends on whom you ask, of course. But quiz enough Wall Street pros and a rough consensus begins to emerge.
Many experts say 2005 will bring modest stock market returns of 5 to 10 percent, much like 2004’s. Stocks of big, quality companies that pay dividends and have exposure to different currencies and emerging economies will outperform those of smaller firms that raced ahead in the past two years but are more sensitive to rising interest rates and a falling dollar, both conditions likely to prevail in 2005.
In addition to boosting dividend payments and buying back their own stock, cash-rich companies will continue to seek out strategic acquisitions, especially in the banking, pharmaceutical and technology sectors. Stocks of potential acquisition targets could soar.
Finally, many experts say the BRIC countries – Brazil, Russia, India and China – will continue to emerge as must-own investments for those eager to tap into the growth of economies that could be among the world’s largest by 2050. In short, experts say, 2005 will be a year for precise decision-making, modest expectations and steady nerves.
“We are looking for mid-to-high single-digit equity returns,” said Tim Leach, chief investment officer at U.S. Trust, a New York money management firm catering to wealthy individuals and families. “But it’s going to be a tortuous path getting there.”
More deals, more growth
The final months of 2004 brought a flurry of deals on Wall Street. Sprint Corp. bought Nextel Communications. Oracle Corp. bought PeopleSoft. Johnson & Johnson bought Guidant Corp. Symantec Corp. bought Veritas Software.
Stocks reacted positively, taking the deals as a sign that companies sitting on massive cash hordes were finally feeling bullish enough to spend. Some strategists viewed the deals with less enthusiasm, noting that several involved companies with slowing profit growth looking to pump up their balance sheets through acquisition.
Nonetheless, coupled with relief over a swift outcome to the presidential election, the deals helped lift stocks to healthy gains in the final months of the year. And several analysts said they expect the trend to continue into 2005, providing a boost to stocks viewed as possible acquisition targets. Shares in targeted companies tend to rise because investors believe the acquirer will pay a premium for the shares.
Michael Obuchowski of Altanes Investments in New York said big drug companies could be shopping around for smaller, high-growth firms to punch up their bottom lines. He mentioned two biotechnology firms, Amgen Inc. and Gilead Sciences, that could be attractive targets. Altanes owns shares in both firms.
“Right now we are in an environment where companies are looking for growth,” Obuchowski said. “Smaller companies in well-defined markets with excellent growth potential are becoming more attractive.”
In addition to making deals, companies are likely to use excess cash in 2005 to continue buying back their own stock, a phenomenon that tends to boost the market overall. In 2004, through October, according to debt-rating agency Standard & Poor’s, companies had repurchased $178 billion in stock, 52 percent more than in 2003. General Electric Co., Kraft Foods Inc. and Deere & Co. have all announced major stock buyback initiatives.
Joseph Lisanti, editor of Standard & Poor’s market forecast newsletter, estimated that as of early December, companies in the S&P 500 stock index were sitting on $600 billion in cash. “It’s very difficult to keep that much on the balance sheet without doing something,” he said.
Big-cap opportunities
Big, dividend-paying companies tend to outperform the rest of the market even more when the profit cycle decelerates, as it is expected to do in 2005.
Jonathan Golub, U.S. equity strategist for J.P. Morgan Funds, said smaller firms are currently trading at very high prices when compared with earnings. The Russell 2000 index, which includes smaller firms, surged in 2004. When earnings slow, companies in the index will seem even pricier than they do now, Golub said. Bigger firms in the S&P 500, meanwhile, are trading at valuations close to the historic average.
Big companies with lots of cash on their balance sheet also tend to do better in an environment of rising interest rates because they are less dependent on borrowing. Multinational firms also have exposure to the surging euro and other currencies and are thus less susceptible to a falling dollar cutting into profits. And they tend to be bigger exporters able to capitalize on a weaker dollar, making their goods cheaper for foreigners to buy.
Among big firms, several analysts mentioned Citigroup as an attractive prospect. While beset by regulatory problems, Citi kept up its consistent profit growth in 2004, but its stock stood still.
Pharma karma?
Although it’s perhaps hard to believe, pharmaceutical stocks are also often mentioned as possible surprise winners in 2005, mainly because share prices in the sector have been beaten down so badly in recent months.
Merck & Co. was forced to recall its arthritis pain-killing drug Vioxx and saw its stock plunge. Shares in Pfizer Inc. got hammered after the company said one trial indicated its arthritis pain drug Celebrex could raise the risk of heart attack. Market strategists cited both firms as possibly emerging from the doldrums in 2005.
“I think pharmaceuticals could be the big surprise,” said Golub of J.P. Morgan. “All the negative news is priced into these stocks. They’ve just been pummeled to death.”
Lisanti of Standard & Poor’s, while not especially bullish on Big Pharma, said if the Bush administration succeeds in its efforts to rein in class-action lawsuits, the beleaguered sector could benefit.
http://www.fortwayne.com/mld/journalgazette/business/10604312.htm
Experts expect equities to rise by less than 10 percent in 2005
By Ben White
Washington Post
First, the case against stocks in 2005: The bull market that began in October 2002 is getting old. The United States is running huge trade and budget deficits. The dollar continues to fall. Corporate profit growth is slowing. Iraq is a mess.
Second, the case in favor: Oil prices have eased somewhat. Inflation and interest rates remain low. The economy, while choppy, keeps chugging along. Companies are flush with cash. Wall Street is humming with merger and acquisition activity.
What is the individual investor to make of all this?
Will 2005 bring robust across-the-board stock market gains, making index funds a safe bet? Or is it time to hunker down with bonds, cash and a few well-picked stocks?
Depends on whom you ask, of course. But quiz enough Wall Street pros and a rough consensus begins to emerge.
Many experts say 2005 will bring modest stock market returns of 5 to 10 percent, much like 2004’s. Stocks of big, quality companies that pay dividends and have exposure to different currencies and emerging economies will outperform those of smaller firms that raced ahead in the past two years but are more sensitive to rising interest rates and a falling dollar, both conditions likely to prevail in 2005.
In addition to boosting dividend payments and buying back their own stock, cash-rich companies will continue to seek out strategic acquisitions, especially in the banking, pharmaceutical and technology sectors. Stocks of potential acquisition targets could soar.
Finally, many experts say the BRIC countries – Brazil, Russia, India and China – will continue to emerge as must-own investments for those eager to tap into the growth of economies that could be among the world’s largest by 2050. In short, experts say, 2005 will be a year for precise decision-making, modest expectations and steady nerves.
“We are looking for mid-to-high single-digit equity returns,” said Tim Leach, chief investment officer at U.S. Trust, a New York money management firm catering to wealthy individuals and families. “But it’s going to be a tortuous path getting there.”
More deals, more growth
The final months of 2004 brought a flurry of deals on Wall Street. Sprint Corp. bought Nextel Communications. Oracle Corp. bought PeopleSoft. Johnson & Johnson bought Guidant Corp. Symantec Corp. bought Veritas Software.
Stocks reacted positively, taking the deals as a sign that companies sitting on massive cash hordes were finally feeling bullish enough to spend. Some strategists viewed the deals with less enthusiasm, noting that several involved companies with slowing profit growth looking to pump up their balance sheets through acquisition.
Nonetheless, coupled with relief over a swift outcome to the presidential election, the deals helped lift stocks to healthy gains in the final months of the year. And several analysts said they expect the trend to continue into 2005, providing a boost to stocks viewed as possible acquisition targets. Shares in targeted companies tend to rise because investors believe the acquirer will pay a premium for the shares.
Michael Obuchowski of Altanes Investments in New York said big drug companies could be shopping around for smaller, high-growth firms to punch up their bottom lines. He mentioned two biotechnology firms, Amgen Inc. and Gilead Sciences, that could be attractive targets. Altanes owns shares in both firms.
“Right now we are in an environment where companies are looking for growth,” Obuchowski said. “Smaller companies in well-defined markets with excellent growth potential are becoming more attractive.”
In addition to making deals, companies are likely to use excess cash in 2005 to continue buying back their own stock, a phenomenon that tends to boost the market overall. In 2004, through October, according to debt-rating agency Standard & Poor’s, companies had repurchased $178 billion in stock, 52 percent more than in 2003. General Electric Co., Kraft Foods Inc. and Deere & Co. have all announced major stock buyback initiatives.
Joseph Lisanti, editor of Standard & Poor’s market forecast newsletter, estimated that as of early December, companies in the S&P 500 stock index were sitting on $600 billion in cash. “It’s very difficult to keep that much on the balance sheet without doing something,” he said.
Big-cap opportunities
Big, dividend-paying companies tend to outperform the rest of the market even more when the profit cycle decelerates, as it is expected to do in 2005.
Jonathan Golub, U.S. equity strategist for J.P. Morgan Funds, said smaller firms are currently trading at very high prices when compared with earnings. The Russell 2000 index, which includes smaller firms, surged in 2004. When earnings slow, companies in the index will seem even pricier than they do now, Golub said. Bigger firms in the S&P 500, meanwhile, are trading at valuations close to the historic average.
Big companies with lots of cash on their balance sheet also tend to do better in an environment of rising interest rates because they are less dependent on borrowing. Multinational firms also have exposure to the surging euro and other currencies and are thus less susceptible to a falling dollar cutting into profits. And they tend to be bigger exporters able to capitalize on a weaker dollar, making their goods cheaper for foreigners to buy.
Among big firms, several analysts mentioned Citigroup as an attractive prospect. While beset by regulatory problems, Citi kept up its consistent profit growth in 2004, but its stock stood still.
Pharma karma?
Although it’s perhaps hard to believe, pharmaceutical stocks are also often mentioned as possible surprise winners in 2005, mainly because share prices in the sector have been beaten down so badly in recent months.
Merck & Co. was forced to recall its arthritis pain-killing drug Vioxx and saw its stock plunge. Shares in Pfizer Inc. got hammered after the company said one trial indicated its arthritis pain drug Celebrex could raise the risk of heart attack. Market strategists cited both firms as possibly emerging from the doldrums in 2005.
“I think pharmaceuticals could be the big surprise,” said Golub of J.P. Morgan. “All the negative news is priced into these stocks. They’ve just been pummeled to death.”
Lisanti of Standard & Poor’s, while not especially bullish on Big Pharma, said if the Bush administration succeeds in its efforts to rein in class-action lawsuits, the beleaguered sector could benefit.
http://www.fortwayne.com/mld/journalgazette/business/10604312.htm