Research Roundtable

Death, taxes — and stock market volatility. Of these we can be certain.

Things aren’t as clear when it comes to the persistently uncertain economy, a fact that makes predicting what’s on tap for 2011’s financial markets far from easy, according to this year’s Research Roundtable of distinguished experts.

Despite the wariness, healthy corporate earnings should be maintained, as well as opportunities in stocks — particularly large-cap — and emerging markets. The outlook for bonds generally isn’t as good, though this is open to considerable debate.

All the action will take place against a background of slow economic growth; but following the November election, a friendlier attitude from government toward business is happily anticipated. Sectors poised for growth include energy, materials, industrials and technology.
Here’s what our four panelists forecast in October 2010.

John Buckingham (Laguna Beach, Calif.) Chief Investment Officer, Al Frank Asset Management, managing $450 million in assets. Editor, The Prudent Speculator newsletter. Manager, the $110 million Al Frank Fund, with an annualized 10-year return of 6.56 percent, through Sept. 30, 2010.

Kenneth L. Fisher (Woodside, Calif.) Chair-CEO, Fisher Investments, which manages $38 billion-plus in assets. Forbes “Portfolio Strategy” columnist for 26 years. Newest book: Debunkery: Learn It, Do It and Profit from It (Wiley-2010)

Nicole Gelinas (New York City) Searle Freedom Trust Fellow, Manhattan Institute for Policy Research. Chartered Financial Analyst, charter holder; Author, After the Fall: Saving Capitalism  from Wall Street — and Washington (Encounter Books-2009)

Robert J. Horrocks, PhD (San Francisco, Calif.) Co-manager, Matthews Asian Growth and Income Fund, with assets of $3.5 billion. Its annualized 10-year return is 14.87 percent, as of September 30, 2010. Chief Investment Officer, Matthews International Capital Management.

What’s the current state of the stock market?

Fisher: In the latter stages of acrophobia from the 2009 move off the bottom. The 2008 decline so convinced people that things had to be terrible immediately ahead that the strength of the 2009 market gave them fear of heights.

Buckingham: A bizarre environment: A lot of money running from one side of the boat to the other, into and out of risk. This zigzag effect has spooked individual investors. It’s been a good year, but filled with volatility and trauma.

Gelinas: We’re still in the same mess, and that’s reflected in the market. Going into our sixth year of the housing crisis, the government still hasn’t found a way to allow the housing markets to clear. The stock market is waiting for some final resolution.

Horrocks: The market has been increasingly building confidence in Asia after the crisis. Valuations are no longer cheap; in fact, they’re very expensive. I wouldn’t describe the markets as euphoric; however, prices are moving ahead and increasing faster than the fundamentals are improving.

Exactly how do you slice and dice Asia?

Horrocks: Japan and Australia are very mature economies with relatively slower rates of growth, but perhaps more stable businesses. On the other end are countries such as India and Indonesia, where the per capita income is much lower. These might still be seen as growth investments.

Is Australia included in “Asia” because of geographic proximity?

Partly, but also because it’s a big producer of commodities, which are being increasingly consumed in large quantities in China and India. When Australian businesses look overseas, they tend to focus more and more on Asia, right on their doorstep.

Emerging markets have been dubbed “hot” this year. What’s your reaction?

Horrocks: I worry when an asset class is described as “hot.” The governments in Asia are looking for sustainable growth for their citizens and to improve their lifestyles in a way that’s manageable over time. That does not align with someone looking at the region as a six-month investment. You should be taking a 10-year view in Asia. So as far as policy-makers are concerned, the reaction to Asian markets’ becoming “hot” will be to try to put up road blocks to any “hot” money coming in with some form of capital or administrative controls to try to damp down the speculation.

What’s your outlook for the U.S. stock market in 2011?

Buckingham: There’s a tremendous amount of uncertainty relating to the economy, the dollar and what’s happening overseas. Still, stocks are attractive. Investors should be focusing on quality companies that will stand the test of time, benefit from doing business around the world and aren’t susceptible to one particular economy.

Fisher: I’ve got rosy-colored glasses on again. Sentiment is lower than it’s been for most of modern history. [Next] year is more bullish than most because, no matter what happens in the election, we’re going to move to gridlock: there will be little or no legislation that takes from these and gives to those — and scares the heck out of everyone else.

Gelinas: It’s like we’re looking into darkness. It’s very hard to see what the outcome will be. This comes from government not understanding its role in the market. It’s been propping up certain sectors, letting others go. How long does this extraordinary government picking and choosing last, and what will happen when it starts to go away?

Investors should be concerned about the large financial institutions. They’re still sitting on hundreds of billions of dollars of first and second mortgages that aren’t worth what they often say they are.

If the government finally says it’s going to force these banks to write down the principal [on mortgages], then you’ll see what their books are worth and have a much better idea of what they, and the capital markets, can lend for future economic activity. That should be reflected in the stock market.

Horrocks: For the short term, it’s still very much tied to capital growth that comes out of the United States and Europe — and those can whipsaw on you very quickly. Right now we’re seeing very strong growth from the developed nations’ economies in the Asian region. That’s pushing up markets and asset prices. Central banks in Asia will [eventually] try to cool the asset markets.

What’s your prediction for U.S. earnings?

Fisher: They’ll continue to come in stronger than expected. But acrophobia has kept people from seeing this, and next year will be in the same vein.

Buckingham: We’ll continue to see bottom-line improvement; top-line growth will be decent.

What’s the biggest threat to the market next year?