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BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
Large-cap stocks look reasonably valued, especially technology stocks and especially foreign stocks (apart from the Japanese market).
For long-term investors, emerging markets are tempting.
As for fixed income, everything looks OK – corporates, high yield, munis, and inflation-protected bonds (TIPS).
The economy itself? Cautious optimism seems to be in order.
Those were the messages conveyed at the Nov. 24Â T. Rowe Price annual press conference at the Princeton Club in New York City. T. Rowe Price, based in Baltimore, is a gigantic money management firm ($366 billion in assets under management) with a splendid record. Over the past five years, 87 percent of T. Rowe Price funds did better than similar funds, according to Lipper Inc.
Brian Rogers, T. Rowe Price's chairman and chief investment officer, compared the disappointing markets last year to an injured patient being treated in an emergency room. Today the patient is recovering nicely, though there's a danger of a relapse.
"We expect a good year next year," said Rogers. He is confident that corporations will boost their dividends, and because money market funds are yielding so little, yield-hungry investors will seek out riskier investments, like stocks. There will also be a "zeal to deal," with mergers and acquisitions returning to favor, as in the case of Berkshire Hathaway's Warren Buffett recently buying a railroad. Hence Rogers' conclusion that in 2010, stocks will outperform bonds.
John Linehan, co-director of U.S. stocks, reminded people that last year the media, like commentators on CNBC, predicted that the economy would "enter the abyss and we would have another Ice Age." Instead, investors would have done well by buying "whatever had not worked" (like high-yield bonds).
He was dubious of small-cap stocks because their prices have risen so high, and was also down on commercial real estate.
But overall he was "fairly positive," saying that the U.S. economy is "resilient and innovative." Bearishness has been "overdone," and the "demise of the U.S. consumer has been exaggerated." Besides which, "There's a lot of money on the sidelines, providing significant fuel for a substantial rally."
Still, he warned that we should "Expect the unexpected."
Steve Huber, lead manager of T. Rowe Price's Strategic Income Fund, pointed out that although the last few years were extremely volatile for fixed-income investments, most of them wound up providing roughly the same return. And so far this year, he noted, riskier bonds have done better. Bonds rated Caa (the bottom of investment grade) lost 44 percent last year, but were up 80 percent this year (to Oct. 31).
Noting that if an investment loses 50 percent, then gains 50 percent, there's still a 25 percent loss (because you're dealing with a smaller number), Huber urged investors to "Pay attention to the downside risk." As for the widespread fear of inflation, "It's priced into the market." (So, even if inflation kicks in, fixed-income investments won't suffer all that much.)
Munis are at a "decent value," Huber went on, also predicting a "friendly year" for high-yield bonds. But there's "little value in asset-based bonds."
Robert W. Smith, manager of the International Stock Fund, considers foreign stocks to be at "reasonable valuations," apart from Japan. ("Japanese stocks are cheap, but they've always been cheap.")
He reported that (as of Sept. 30) price-book ratios for European stocks were 1.71, but 2.12 for U.S. stocks. Forward price-earnings ratios were 13.33 for European stocks, 14.83 for U.S. stocks. Dividend yields for European stocks were 3.45 percent versus only 1.97 percent for U.S. stocks.
Michael Conelius, who runs the Emerging Markets Bond Fund, was even more sanguine about emerging markets, saying that the bonds remain "fundamentally sound."
Kennard Allen, manager of the Science & Technology Fund, said that although tech stocks have "led the rebound, they still look good to invest in. They have strong balance sheets," and "innovations may create investor opportunities." One forthcoming stock to watch: Facebook.
If an investor is fortunate, Allen said, he or she might have bought a stock like Research in Motion, which appreciated from $2 to $112 in recent years, thanks to the Blackberry. Which other stocks are "well positioned"? He mentioned Salesforce.com, and Red Hat. And said that Google and Apple are still growing.
Chief economist Alan Levenson forecast an "extended convalescence" for the economy, and predicted that housing – because of so many unsold homes – would need four or five years to recover.
Warren Boroson will answer readers' questions sent to him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
