With many companies in many sectors sitting on mountains of cash, equities just might outperform bonds despite all the current craziness in the stock markets, said a group of portfolio managers brought together this month for a Fidelity Investments forum.
The Fidelity Viewpoints Inside/Out forum’s panelists—including BlackRock chief equity strategist Bob Doll, Fidelity portfolio manager Tom Soviero and GAMCO Chief Executive Mario Gabelli—said they don’t expect a double-dip recession, but instead foresee continued slow growth and an upside for stocks over the next year.
The portfolio managers pointed to the activity that is bound to come as companies with a lot of cash spend it. The list included dividend payouts, share buybacks and mergers and acquisitions.
Doll said the probability of a recession—absent a shock such as a bust in Euroland—is unlikely. “As a result, I believe that the market will move higher 12 months from now despite this high degree of pessimism. You can find all kinds of companies that are delivering the goods that are pretty cheap,” he said.
In written remarks that followed the forum, Doll advised investors to lean toward stocks at the expense of bonds. He especially favors companies in the Technology and Healthcare sectors, and says that while there are risks in Europe, “I don’t invest in the governments or economies of those countries, I invest in the companies that happen to be domiciled there.”
“I believe the market is pricing in a recession that we’re unlikely to get, which makes me reasonably interested in stocks versus other investments,” Doll said. “Corporate America’s balance sheets are also as healthy as they’ve been since the 1950s, and free cash flow is equally strong. As a result, I think there are four things that we will enjoy: inordinate dividend increases, higher-than-normal share buybacks, rising merger and acquisition deals, and plain old-fashioned business reinvestment,” he said.
Like Doll, Fidelity’s Soviero, who favors consumer companies as well as materials firms with exposure to developing markets, also noted that companies are flush with cash now. Soviero predicts market volatility will encourage those companies to spend their cash on shoring up their balance sheets.
“When there is more business certainty or a better outlook, companies will devote some of that cash to capital spending, which creates growth and jobs,” Soviero wrote in a comment. “But market volatility and a panic-driven mindset dampen that type of expansion. Instead, companies will lean toward using their cash to acquire other companies or their own stock.”
Overall, Soviero said, companies since 2009 have been going through a process of reducing leverage, and he is looking to buy into highly leveraged companies that are improving their balance sheets because that can drive an equity higher.
He also is looking to see a lot more activity in mergers and acquisitions.
“Buying another company can be very beneficial to earnings,” Soviero wrote. “I think the premiums on M&A transactions have been pretty high recently, which tells you that when stocks get cheap enough, corporate America will snap them up. That’s especially true when cash is earning less than 1% on the balance sheet…. There have been a lot of mergers and acquisitions in the U.S., and most of them are cash deals, and I think that’s very bullish for the market.”
GAMCO’s Gabelli takes a more bearish view, though he foresees a better-than-expected third quarter than the markets are pricing in.
“I think third-quarter earnings will be better than most people expect, in part, because the euro is higher than a year ago. That could give U.S. companies with earnings in euros a 10% bump—and the market may not expect that,” he wrote in a comment.
Gabelli, who’s bullish on energy, health, farm equipment and airlines, predicts that equity markets could grow 5% to 7% a year in real terms over the next 10 years.
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