Strategists Kelly, Doll, Ryan Bullish on U.S.: IMCA Conference

Panelists divide sharply over emerging markets

Three prominent investment strategists offered good tidings of positive U.S. market performance for the balance of the year. David Kelly of JP Morgan Funds, Robert Doll of BlackRock and Michael Ryan of UBS Financial Services buoyed an audience of financial advisors on the second day of IMCA’s annual meeting in Las Vegas with their upbeat consensus. The trio’s biggest disagreement concerned the performance of emerging markets.

david kelly of jp morganKelly (left) started the session by quashing investor fears of a double-dip recession and inflation. He said a double-dip recession implies a collapse of the cyclical sectors that typically rise as we emerge from recession. But these sectors never really got off the ground and consequently have nowhere to fall. Already two years out of the recession, the U.S. economy has achieved a mere 2.8% rate of growth — far short of the big bang that is normal after a recession. U.S. auto sales, housing starts and business equipment sales would need to shoot up dramatically to get up to trend. Kelly sees pent-up demand for these goods and expects rapid growth in the second-half of the year.

Nor does he worry about rising prices in the U.S. “If high commodity prices do not cause wages to go up, they will not stick in terms of inflation,” he said. Overseas is another matter. “Everybody’s been putting money in commodities and emerging markets. Eventually their monetary authorities will have to tighten,” he says. But Kelly, a native of Ireland, doesn’t think emerging economies have the fortitude to correct their problems in time enough to avoid a bust. He said of Ireland in the recent past and emerging markets currently, “They’ve never had a boom so good. When you’ve never had that, it’s awfully hard to take away the punch bowl.”

BlackRock’s Doll endeavored to reframe the way we think about the economy as he too heralded good news for the U.S. economy. We’re not in recession, we’re not in recovery, he said. “We’re in expansion. GDP is at an all-time high,” he added. He predicted that the U.S. will outperform other developed markets for the coming decade, and for the time being will outperform emerging markets. Until emerging markets quell inflation, “those markets will remain sloppy,” he said. The U.S., on the other hand, should create 2 to 3 million new jobs, unemployment will fall somewhat and the stock market will produce a third year of double-digit returns, according to Doll.

Ryan of UBS also sees a continuation in the rebound of U.S. stock prices, which he estimates are trading somewhere below their historic averages. “All we need are trend earnings, not spectacular ones” to produce 8.5% to 9% average returns this decade. Ryan dismissed the possibility of another “lost decade” for stocks, saying such events do not occur sequentially or frequently enough in market history.

On the subject of emerging markets, Ryan took strongest exception to the opinion of his fellow strategists. He called emerging markets “the next big shift,” and argued that the dynamics of growth favor this trend. Analyzing world economic growth used to be as simple as looking at the trajectory of just three countries: the U.S., Germany and Japan. But world growth trajectories have diverged, he says. In 1988, emerging markets represented just 2% of world market capitalization. That figure could rise to as much as 20% over the next 20 years. “The cycle’s just begun,” he says.

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