The worst of the recession is behind us and improving economic conditions during the second half will help boost equity prices, with stocks likely to outperform all other asset classes
The worst of the recession is behind us and improving economic conditions during the second half will help boost equity prices, with stocks likely to outperform all other asset classes over the next 12 months, according to Robert C. Doll, vice chairman and global chief investment officer of equities at BlackRock.
Doll believes that stocks in the US and most other markets are on track to post double-digit percentage gains this year, with US stocks outperforming European stocks and emerging markets outpacing developed markets for all of 2009.
Prospects for equities will depend largely on the pace and extent of global economic recovery, Doll says.
‘Numerous economic ‘green shoots’ have emerged, with home buying levels, housing inventories, business confidence, consumer confidence, corporate inventories and industrial production levels all more positive than a few months ago. Productivity measures have also been trending higher, which is good news for corporate profits, inflation and overall growth.
‘However, these green shoots are sprouting in ground still largely barren. The labour market is under tremendous strain, with monthly declines in jobs levels in the six digits and unemployment now exceeding nine per cent. Many consumers are still unable or unwilling to ramp up spending. Additionally, the outlook for corporate earnings remains uncertain and many companies are still struggling with the possibility of bankruptcy.’
For 2009, Doll estimates that global growth will be between 0.5 per cent and one per cent – the lowest level seen in the post-World War II period – and non-inflation-adjusted US growth will be negative, the first such GDP decline in the US economy in 50 years.
‘We expect that GDP will decline by around one per cent to two per cent in the second quarter, and in the second half of 2009 we are expecting to see growth at around the zero level, probably on the positive side of zero,’ Doll says.
He believes economic recovery should become more evident in 2010, but it will likely be ‘a subpar one’, with GDP expanding by around two per cent next year.
In the weeks since the equity markets’ low, reached on 6 March, stocks have staged an impressive upward run, appreciating around 40 per cent. Doll says the question is whether the rally represents the start of a longer-term return to improved market conditions, or more of a blip in a longer-term downtrend.
Equities have entered a ‘sideways correction phase’, according to Doll, and though it is extremely unlikely that prices will retreat back to their early-March levels, some modest near-term declines with continued volatility are likely.
At the same time, the current upturn significantly differs from previous, failed rally attempts, Doll says.
‘From a technical perspective, the recent rally has been marked by strong momentum and expanding volume on the upside, and diminishing momentum and volume on the downside. Also, lower quality and more cyclical areas of the market have been outperforming, as have emerging markets when compared with developed markets, trends that occur when more sustained recoveries begin.’