Investment Themes: Technology, Telecommunications
And Restructuring
NEW YORK, Dec. 14 /PRNewswire/ -- Merrill Lynch research analysts expect
the world economy of 2000 to feature accelerating growth, lower inflation and
low interest rates.
The firm's economists forecast global GDP growth at 3.3% for next year,
above consensus expectations, and up from an estimated 2.7% in 1999. They
believe that the U.S., Europe and Japan will be joined by robust economic
recovery in emerging markets with Asia growing 6% and Latin America growing
3.3%.
Across all markets, technology, communications and restructuring are the
consistent investment themes. Wireless and data advances have propelled
valuations over the past few months and favored technology themes for the next
year include wireless, together with e-commerce, business to business,
computer services and semiconductor stocks.
This year, stock picks from the global sectors contain more non-U.S.
companies than at any other time in the past three years. Equity markets
favored by Merrill Lynch are Japan, Europe and Asian countries such as Korea,
Taiwan and Hong Kong.
In 2000, both the U.S. and Russia will hold presidential elections;
politics will be back in the market arena after an extended absence and may
create uncertainty.
Merrill Lynch analysts feel that the level of preparedness in major
economies for Y2K appears high, with fears over prospective fallout easing as
we approach the deadline.
While the U.S. continues to reap rewards from extensive restructuring and
technology investment, the pace of restructuring appears set to intensify in
Europe, Japan and the emerging markets. Massive consolidations across all
industries are expected, especially the financial sector.
Merrill Lynch's top economists, strategists and market analysts addressed
reporters in New York at the firm's "2000 -- The Year Ahead: Meeting The
Millennium" conference. Press conferences are also being held in London,
Toronto, Hong Kong, Singapore, Sydney, Melbourne, Auckland and Tokyo to
present Merrill Lynch's global outlook.
Following are highlights of the U.S. press conference:
Economic Outlook
Chief Economist Bruce Steinberg stated that Merrill Lynch is "bullish on
America." He expects 2000 to be another year of strong growth, low inflation
and double-digit earnings gains. He projects that U.S. GDP will rise 3.8% in
2000 vs. an estimated 4% in 1999, representing above consensus expectations.
He expects the Fed will probably tighten again, pushing the fed funds rate up
to 5.75% by the end of the first quarter. He said that bond yields should
remain in a broad 5.9%-to-6.4% range with some upside risk. Merrill Lynch
expects S&P 500 operating earnings per share to rise 12% to $57. This
earnings per share forecast is well above consensus.
Globally, he forecasts an acceleration of economic growth in 2000, with no
acceleration in global inflation. European growth should pick up but lag that
of the U.S.; Japanese growth should beat consensus estimates and deflationary
pressures may ease. Monetary policy at the Fed and the European Central Bank
is likely to be tightened during the first half of 2000. The Euro should
eventually rise but the Yen should eventually weaken.
Investment Strategy
According to Charles Clough, Chief Investment Strategist, investors
particularly in the U.S. will have to think globally in 2000. He believes
that non-U.S. stock markets are likely to outperform the U.S. He said that
Asia should be the best performing region and that once again Japan should be
the best performing major market. Asia is becoming a technology story as well
as a recovery story. The momentum in technology, particularly as wireless
communication and the availability of ample broadband become the dominant
investment themes, could migrate in particular to Japan. Recovery in Europe
should accelerate and stock markets there should benefit from restructuring.
He also forecasts that inflation fears that accompanied signs of global
recovery could dissipate and Anglo-Saxon bond markets could rally. U.S.
stocks will likely have even fewer themes in 2000 as the credit cycle peaks.
Technology investment should stress the wireless communications sector. While
de-emphasizing consumer cyclicals he thinks that investors should seek out
sectors that benefit from a global recovery, such as selected basic industry
stocks. REITs and natural gas issues appear to present the best values.
Quantitative Strategy
Richard Bernstein, Chief Quantitative Strategist, notes that the more
optimistic an investor is about the rejuvenation of the global economy and the
global profit cycle, the more the investor should focus on value, small cap,
and lower quality stocks. He says, in a stronger global profit environment,
it makes sense to moderately underweight the U.S. in favor of other regions.
He recommends overweighting the emerging markets, which he views as
"small cap, lower quality" issues that tend to outperform when profit cycles
accelerate. His preference is Asia, but he noted that Latin America also has
begun to significantly improve. For those who cannot invest in emerging
markets, he suggests a larger weight in Japan. He also favors "commodity"
related investments.
In the U.S. he suggests that investors overweight the "Not-So-Nifty-450."
He said that he is not anti-technology but is anti-"Nifty 50." There are many
low quality and cyclical technology stocks that fit well into his theme. He
cited the example of 1999's relative outperformance of lower quality
semiconductor stocks. The one sector in which investors may want to continue
to overweight higher quality issues is the cyclical consumer industries, such
as retailing and home building. He noted that although the equity market has
technically been a bull market for the past several years, the performance of
the average stock has been poor. That may reverse, causing the market to
broaden. This would allow the average stock to fare well while the popular
benchmarks may lag.
Market Analysis
Chief Market Analyst Richard McCabe noted that the world's major markets
have been in a linear uptrend since early 1993. Indeed, 35 of the 38 markets
that Merrill Lynch most regularly monitors are higher now than they were at
the end of 1998. Emerging markets are still engaged in an uptrend that began
in September 1998 and this has the potential to carry into early 2000.
He said that the U.S. market may face an interim corrective phase early in
the new year, as may Canada. From here, the stage would be set for a broader
U.S. market advance. In the U.S., the next phase of market advance could
produce above-average performance by the long-neglected mid-to-small cap
sector of the market. A new broad market advance in 2000 would likely require
an easing of interest rates. He said that investors should watch for evidence
of technical improvement in the "value" areas such as energy, basic
industrials and capital goods, during an early 2000 market setback. Other
groups that presently appear attractive on a technical basis for accumulation
during periods of market weakness are advertising, biotechnology, media and
paper/forest products, as well as some of the relatively less exploited
technology-related groups such as computer software, semiconductor-capital
equipment and selected computer service issues.
In the U.K. and Continental Europe, a strong start to the year is likely,
but there is a growing risk of a cyclical downswing in the second quarter. In
Japan, the current rally appears to have upside potential to the 21,000 area
for the Nikkei. In Latin America, he anticipates a broad-based rally into
early 2000. He favors Mexico as the top tier market although Brazil has
recently moved ahead locally and in dollar terms.
Fixed Income
Martin Mauro, Senior Economist and Fixed Income Strategist, recommends
that individual investors take advantage of the higher yields available in the
investment-grade market beyond Treasury securities. He stated that the
scenario of solid U.S. growth and low inflation should be a favorable
environment for corporate and agency bonds, as well as preferred stocks. In
addition, he stated that the relatively low decline in Treasury yields are
making municipal securities more attractive as well.
He predicted that yields should remain in a fairly narrow range in the
early months of 2000 and therefore indicated, the appeal of bonds, at that
time, should be in their coupon income. Later in the year there should be
renewed potential for capital gains.
Currency Strategy
Neil MacKinnon, Chief Currency Strategist, said in a video presentation
that he expects the U.S. dollar to continue to perform well enough to prevent
a dollar crisis. He expects the recent trend of the U.S. dollar, following
the movements of the U.S. stock market, to continue. He also predicts that
2000 will be a better year for the Euro and advocated a "long Euro, short Yen"
position as a profitable trade strategy.
Senior International Economist Michael Hartnett, also on video, summarized
next year as an environment in which, "non-inflationary expansion will
ultimately continue to be very positive so far as global asset markets are
concerned."
Global and regional versions of "2000 -- The Year Ahead: Meeting The
Millennium" are available in traditional form and on the Internet.
(http://www.research.ml.com/2000YearAhead)
Merrill Lynch Global Securities Research and Economics has over
800 analysts in 26 countries. Merrill Lynch is the only firm to place first
in five of the six Institutional Investor research surveys. Among its many
research awards in 1999, the firm was also voted "Best Firm for Research" in
Euromoney's Awards for Excellence, sweeping all five categories, a first for
any firm.
Merrill Lynch (NYSE: MER) is one of the world's leading financial
management and advisory companies with offices in 44 countries and total
client assets exceeding $1.5 trillion. As an investment bank, it is the top
global underwriter and market maker of debt and equity securities and a
leading strategic advisor to corporations, governments, institutions, and
individuals worldwide. Through its Asset Management Group, the company is one
of the world's largest managers of financial assets, which total approximately
$514 billion.
SOURCE Merrill Lynch
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