Showing posts with label 2009 Investment Strategy and Outlook. Show all posts
Showing posts with label 2009 Investment Strategy and Outlook. Show all posts

Sunday 3 October 2010

Stage Is Set (Again) for a Blue-Chip Revival

Fundamentally

Stage Is Set (Again) for a Blue-Chip Revival

By PAUL J. LIM
Published: October 2, 2010

EVER since big blue-chip domestic stocks fell out of favor in early 2000, many market strategists have regularly been predicting their imminent return to glory.



In 2003, after the tech bubble burst and market valuations started to fall back to earth, large-capitalization stocks were supposed to catch a second wind. They didn’t.

Amid the global financial panic of 2008, investors were supposed to regain their appetite for blue chips because, in uncertain times, these industry-dominating companies could offer steadier growth. Yet, that year, large-cap stocks fell even harder than small-company stocks. And to add insult to injury, small stocks went on to outpace large ones in 2009 and so far this year. 

Today, some market watchers are armed with a kitchen sink full of arguments that the stage is set for a blue-chip revival.

Not only are the large caps cheaper than small caps by historical standards, but some of these big companies, like Hewlett-Packard and Microsoft, are trading at price-to-earnings ratios of nine or less, based on projected earnings. Large stocks also have greater exposure to foreign markets, including emerging markets like China. 

“I actually think large-cap stocks have more growth potential because they can go outside the United States,” said Thomas H. Forester, manager of the Forester Value fund, who has been bullish about this group since 2008.

Large stocks are also sitting on a mountain of cash. “At some point, these companies will start using that money to raise dividends, buy back their stock, or start buying each other,” said Robert E. Turner, chief investment officer at Turner Investment Partners, a money management firm in Berwyn, Pa. He says that cash has been especially important since the disruptions of the financial crisis.

All of these trends could benefit large-cap stocks, which have had a miserable decade. While small caps were up nearly 4 percent, annualized, from 2000 to the end of 2009, and mid-caps rose more than 6 percent, annualized, the large-cap Standard & Poor’s 500 lost about 1 percent. 

But before investors get too worked up about a pending blue-chip boom, it’s important to note that it could take months, if not years, before large stocks stage a real comeback.

FOR starters, the bull market that began in March 2009 is only 18 months old. Historically, shares of small-but-nimble companies have outpaced the blue chips through the first two years of a rally, according to Sam Stovall, chief investment strategist at S.& P. In fact, in the second years of bull markets since 1950, the S.& P. 600 index of small stocks has gained 22 percent, on average, versus 18 percent for the S.& P. 500 index of blue-chip shares.

So “there’s absolutely no reason why small caps can’t keep outperforming large caps,” Mr. Stovall said.
James B. Stack, editor of the InvesTech Market Analyst, a newsletter based in Whitefish, Mont., noted that the so-called Nifty Fifty era — when the market’s biggest growth stocks dominated — came to an end in the 1973-74 bear market. After that, small stocks trounced blue chips until the early 1980s.

That’s not the only example of a slow recovery. After the 1929 crash, it wasn’t until 1945 that large stocks made it back to even. And blue-chip stock prices appreciated at a relatively modest rate in succeeding years: 4.6 percent, annualized, from 1945 to 1953.

Finally, there’s this: Large stocks continue to be the darlings of professional investors. A recent survey of money managers by Russell Investments found that two-thirds described themselves as bullish on large growth stocks, versus only around half who are similarly optimistic about small-cap shares.

That may not be a good sign. “If the consensus says small caps will underperform large caps, you know there’s a good chance they won’t,” Mr. Stovall said.

At the very least, says Robert Sharps, who manages assets for T. Rowe Price institutional clients, even if blue chips don’t return to their late-1990s glory anytime soon, it’s still “highly probable that returns in the next decade will be markedly better than the last one.” 

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2010/10/03/business/economy/03fund.html?_r=1&ref=business

Thursday 15 October 2009

Selling could be as big a gamble as holding out for bigger gains.

Gold and shares are booming, so is it time to sell?
The Coppock Indicator, which has signalled past rallies, points to the bull run continuing. Selling could be as big a gamble as holding out for bigger gains.

By Paul Farrow
Published: 10:52AM BST 12 Oct 2009


Asked if he was selling gold, a leading fund manager said: 'Absolutely not. I think everybody should have a bit of gold' I'd imagine it was a dilemma for Sir Alex Ferguson, the Manchester United manager, last summer: wondering whether it was time to cash in on his biggest asset, Cristiano Ronaldo, or to hang on to to him for another season.

He cashed in to the tune of £80m and so far it looks like a shrewd decision. Knowing when to sell is arguably more crucial than knowing when to buy.


Related Articles
Diary of a private investor: Three reasons why it is bigger risk to be out of the market
Comment: investors doubt that this bull market has legs
Coppock's score will encourage investors to strike up the recovery band
FTSE100 rally: fund and share tips from the experts, part II
Is the first-quarter rally sustainable?

It's a conundrum that may be on many people's mind right now. The economy is on the up, shares are up, gold is up and even house prices have returned to late 2008 levels. Yet you get the feeling that everyone is expecting a reality check sooner rather than later and that the rises will turn out to have been froth.

The fear is that underlying problems that manifested themselves during the recession will linger long after the growth figures have turned positive and that these problems will drag us back down.

As one property consultant proclaimed last week: "For anyone considering selling their home, now is the time to do so. It is a window of opportunity that may soon shut." Well, he would say that, wouldn't he, but the pessimistic property commentators outnumber the optimistic ones by some margin.

The steep rise in share prices will also get investors asking themselves whether now is the time to take some profits. However, a couple of reports suggest that the market may yet prove resilient.

The Coppock Indicator, which is less about selling and more about buying, might dissuade investors from taking profits now. The story goes that in the early 1960s the Episcopalian Church in America asked Coppock, an economist, to come up with something that might spot long-term buying opportunities.

Coppock thought the stress caused by a bear market was comparable to bereavement. He asked the church how long, on average, a period of mourning might last; the answer, apparently, was between 11 and 14 months.

The indicator (a 10-month weighted moving average of the sum of the 14-month rate of change and the 11-month rate of change in the relevant index, if you really want to know) produces a buy signal when it is both below zero and turning upwards from a trough.

It does not have a 100pc success rate but in recent times the indicator signalled rallies in 1988 and 1994. The indicator started to turn a couple of months ago and is now rising.

Meanwhile, Ned Davis, a well-known investment research firm based in the US, reckons the bull market, although slowing, still has legs. Its latest bulletin concludes that "with the global economic recovery in its early stages, and absent threatening levels of interest rates and valuations, the six-month horizon does not include another bear market".

Its calculations suggest the climb over the next six months will be more gradual than the humdinger of a run the markets have experienced since the March lows.

Gold investors are another bunch who have enjoyed rising values. When it comes to gold, it would appear the bears are in hiding, but the endless queue of bulls insist the case for holding gold remains intact. Ian Henderson, one of Britain's leading fund managers, is not one of the pundits with a vested interest, but he is a firm believer in the asset's diversification qualities.

He does not think the gold price is going to storm ahead but ask him whether he is looking to liquidate his exposure to gold and the response is firm: "Absolutely not. I think everybody should have a bit of gold."

The upshot is that Man United couldn't afford to turn the record £80m offer for Ronaldo down but I doubt the recent gains will be enough to tempt home owners and investors to cash in. For most it will be as big as gamble to sell as it would be to stay put.

Tory baby bond plan misguided
Labour promised to turn us into a nation of savers; now the Tories have promised to do the same. They want to reverse the effects of Gordon Brown's pensions tax raid and get the country saving again.

All very commendable, although George Osborne's speech was thin on the detail of how he hopes to persuade the masses to salt more of their money away. One measure he did mention will mean we actually save less for our future. Mr Osborne wants to ditch child trust funds (CTFs) for all but the poorest children because "handing out new baby bonds to the rest of the country is a luxury we can no longer afford".

He's right, of course; we can't afford them. Besides, CTFs benefit only those families that have enough spare cash at the end of the month to put some aside for their children. But if the Tories go so far as to scrap CTFs for the majority, they might just as well get rid of them altogether.

The party says it "will fight for the poorest" but, if it wants to help in any meaningful way, child trust funds are not the answer. These funds will end up being an almost worthless pot if the only contribution has been the Government's free handout of £500. If the full £500 was invested and grew at 5pc year a CTF would be worth around £1,000 after 18 years.

That would barely cover the fees for a term at university, let alone be enough for a deposit on a first home. It might be enough for a second-hand banger and a year's insurance – but it won't make an iota of lasting difference to an 18-year-old when they venture out into the adult world.

http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/6305438/Gold-and-shares-are-booming-so-is-it-time-to-sell.html