NEW YORK--(BUSINESS WIRE)--The investing environment for the next 10 years won’t match the boom conditions of the 1980s and 1990s, but will be much better than that of the decade just ended, according to “10 Predictions for the Next 10 Years” developed by Robert C. Doll, Vice Chairman and Chief Equity Strategist for Fundamental Equities at BlackRock, Inc. (NYSE: BLK).
Doll is forecasting annualized U.S. stock market returns of close to 8% for the coming decade. “Many investors want to forget the last 10 years, which featured the two worst bear markets since the Great Depression,” Doll said. “We’re not likely to see double digit stock returns in the coming 10 years, due to ongoing deleveraging and significant structural problems. But two disastrous market decades in a row is extremely unlikely as well.”
U.S. equity returns will lead the developing world, outpacing those of other developed markets due to more attractive valuation measures, stronger secular growth, more shareholder-friendly management practices and more serious structural problems in non-US economies.
Though stocks will likely record a positive decade, investors will need to cope with a larger number of recessions than they have over the past 20 years, as the frequency of recessions returns to a more “normal” level, Doll believes.
He also believes that, in a global environment where emerging economies will lead world growth, China will continue to grow strongly as an economic and political force.
Since the 1990s, Doll has published a series of economic and market predictions at the beginning of each year, addressing the state of the US and global economies, potential returns for equities and other asset classes, geopolitical developments and other topics that significantly impact investors. His predictions for the next 10 years recognize – in addition to the start of a new decade – many of the key issues of concern to investors as the global economy and world financial markets continue recovering from the near-depression conditions of 2008-09.
Here are Doll’s “10 Predictions for the Next 10 Years” with his commentary.
1. U.S. equities experience high single-digit percentage total returns after the worst decade since the 1930s.
Doll believes it is reasonable to assume that normalized earnings-per-share growth and P/E ratios for the S&P 500 over the next 10 years match their median rates since 1957, resulting in an S&P 500 Index level of 2,034 by the decade’s end (the Index closed at 1,102 on July 30th). That would translate into an annualized price gain of 6.2% and a dividend yield of 1.9%, for an estimated total return of 8.1%.
2. Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years.
Over the past 20 years, the economy has entered recession once every eight years, compared with once every 3.8 years over the past 100 years. Doll believes that over the next decade, recession frequency will be closer to the long term average.
“What investors have become accustomed to -- somewhat infrequent recession – is in fact abnormal,” Doll said. “Going forward, we will see a more normal occurrence of recession.”
Recessions will occur more frequently because the current global recovery is not “synchronous,” due to broad debt and leverage issues. “US consumers are still burdened by high debt levels, the banking system in the developed world remains highly troubled and, as the European sovereign debt crisis shows, the globe is still subject to deleveraging problems,” Doll said.
3. Healthcare, information technology and energy alternatives are leading growth areas for the U.S.
The healthcare, information technology and energy alternatives sectors of the economy are likely to experience significant innovation acting as key drivers for growth in coming years, Doll said.
Healthcare spending levels will almost certainly continue to rise with the aging boomer population, Doll said. Advances in biotechnology, the rise in patient-driven research and an increasing move toward digital healthcare record-keeping are potential growth areas for the healthcare sector.
Information technology’s impact will be broadened by the sheer growth of new types of computers and entertainment devices, advances in microprocessor speed and capacity, innovations such as cloud computing and the emergence of social networking tools as economic growth engines.
Development of energy alternatives will be supported by increasing taxes on carbon emissions, Doll believes. “Energy innovation will be driven by the realities of supply -- such as diminishing coal availability -- and geopolitical issues -- much of the world’s oil is controlled by governments unfriendly toward the United States,” he said.
4. The U.S. dollar continues to be less dominant as the decade progresses.
5. Interest rates move irregularly higher in the developing world.
In the coming decade, the greenback’s prominence will continue to fall as increasing debt levels for the United States will likely act as a drag on the dollar’s value, Doll said. But he also expects that the dollar will remain the world’s principal reserve currency.
“The yen is plagued by Japan’s deflationary environment and the euro remains under tremendous stress as the European economies experience their own debt issues,” Doll said. “At the same time, the dollar is still the most liquid currency available, the market for US government paper remains the world’s largest and the US dollar is likely to still be one of the primary beneficiaries of ‘flights to quality’ that occur during financial crises.”
On a related point, Doll anticipates that gold prices will remain at elevated levels. “Many have been turning to the precious metal as a form of ‘alternative currency’ in the face of uncertainty — a trend we do not believe will be ending any time soon,” he said.
Globally, interest rates also are likely to rise with inflation concerns. “Today’s accommodative monetary policy, quantitative easing measures and historically low interest rates are collectively working to stimulate demand,” he said. “Over the next 10 years, we expect the global economy to gradually transition from deflationary trends to inflationary pressures.”
6. Country self-interest leads to more trade and political conflicts.
7. An aging and declining population gives Europe some of Japan’s problems.
Around the globe, as individual economies continue to struggle, politicians will seek to react to high levels of unemployment. “Trade scapegoating” -- with associated protectionist measures and trade and political conflict – will be on the rise, Doll believes.
“We have already seen signs of new protectionist leanings in the United States, with debates over the inclusions of ‘Buy American’ provisions in the 2009 stimulus package and the ongoing disputes with China over its currency policies,” he said. “Other countries as well are increasingly looking to protect domestic industries in a difficult growth environment.”
Europe, in particular, will be beset by structural economic problems and demographic issues, similar to some of the phenomena that have plagued Japan’s economy since the early 1990s, Doll believes.
“European policymakers have been relatively slow to react to financial crises, with the European Central Bank continuing to raise interest rates through mid-2008 as the credit crisis was emerging and even as asset prices were beginning to collapse,” he said. “Both Europe and Japan strongly depend on exports for economic growth, making these regions more subject to external shocks and negatively affected by the increases in their currency value that have occurred over the last 10 years.”
As in Japan, a shrinking labor force will likely hurt Europe too, as the Continent’s population ages and birth rates decline.
8. World growth is led by emerging market consumers.
9. Emerging markets weighting in global indices rises significantly.
Over the coming decades, the United States will remain a global leader in terms of economic power, but it will no longer be the undisputed king, Doll believes.
“The global economic recovery that began to develop in 2009 was led by emerging markets, and we expect their leadership to continue through the coming decade,” he said. “Private consumption growth in emerging markets is already higher than that of developed markets, wage growth remains high and emerging market population is relatively young and increasingly well educated. Looking ahead, we expect that domestic demand within emerging markets, rather than exports, will increasingly become a growth driver.”
According to an analysis by PricewaterhouseCoopers, by 2050, the largest seven emerging economies (China, India, Brazil, Russia, Mexico, Indonesia and Turkey) will be close to 50% larger than the current G7 (U.S., Japan, Germany, United Kingdom, France, Italy and Canada). This analysis also suggests that China will overtake the U.S. as the largest economy around 2025, and India has the potential to surpass U.S. growth levels by 2050.
As emerging markets become even more significant to the global economy, they also will be an increasingly large part of the global equity market, Doll noted. As an illustration, in 1989, the MSCI All Country World Index included only eight emerging markets, accounting for less than 2% of the index. Today, there are 22 emerging markets in the index, accounting for 12%. These growth trends will continue over the next 10 years, Doll believes.
10. China’s economic and political ascent continues.
In 2009, China surpassed Germany as the world’s largest exporter, and will likely surpass Japan and become the world’s second-largest economy over the next year. China is also already the world leader in automotive sales and in steel production and is the largest buyer of US Treasury paper and largest holder of foreign currency reserves.
At the same time, China is still only in the initial stages of industrialization, Doll notes. “The Chinese population continues to grow rapidly; the country has a wide array of available natural resources; Chinese per-capita consumption levels are low, and are likely to rise; and the Chinese government is actively promoting policies designed to further ‘urbanize’ the country, encouraging its population to shift away from agriculture and into manufacturing,” he said.
China’s structural problems include an aging population, the ongoing threat of political unrest, and an economy still largely state-controlled and hampered by low levels of innovation. “China’s issues notwithstanding, its growing prominence on the world’s economic and political stage is unlikely to be altered,” Doll said.
Putting It Together for Investors
Given his market and economic outlook, Doll suggested several areas of long-term opportunity for investors and their advisors:
1. Overweighting stocks and other risk assets vs. Treasuries and cash: While equities are unlikely to achieve their long-run, low double-digit compound returns, returns in the high single digits would still represent a number that other asset classes will struggle to achieve.
2. Overweighting U.S. stocks vs. other developed market equities: Over the past six months, US stocks have dramatically outperformed their international counterparts, and we expect this trend will continue for some time.
3. Focusing on opportunities in emerging markets: In addition to direct investments in emerging markets, we encourage investors to also consider gaining exposure through large US multinational companies. In general, such companies are innovative; have a record of effectively allocating capital; operate under stronger corporate governance standards, and have a greater shareholder orientation than most companies in the developing world.
4. Allocating to better-positioned sectors: There is tremendous long-term growth potential in the healthcare, information technology and energy sectors within the United States. Investors should consider overweighting those sectors in their investment portfolios.
Finally, given that relatively high levels of investment uncertainty are likely to continue over the next 10 years, we encourage investors to focus on some of the basic tenets of investing. A renewed focus on asset allocation and risk management is critical. We believe investors should remain focused on long-term goals, sticking with diversification strategies to maximize the risk/reward balance, regularly rebalancing your portfolio and remaining in close contact with your financial professional.
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International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Investments in commodities may entail significant risks and can be significantly affected by events such as variations in the commodities markets, weather, disease, embargoes, international, political and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Asset allocation strategies do not assure profit and do not protect against loss.
The opinions presented are those of Bob Doll, BlackRock Vice Chairman and Chief Equity Strategist for Fundamental Equities, as of July 12, 2010 and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that may, in certain respects, not be consistent with the information contained in this press release. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock® to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
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