Time to dollar average on stocks,
says BlackRock strategist

With the deep despair of yesteryear over the global economy finally receding, investors should try to invest through a dollar cost averaging strategy, says Bob Doll, the vice-chairman and chief investment officer for global equities at the US asset management firm, BlackRock.

He expects the S&P 500 index to gravitate towards 1,000 by the end of this year despite the likelihood of encountering several correctional bouts along the way.

"We still think we are going there to a thousand but we will probably hit 800 first. In the meantime, investors should be start looking to switch out of safe assets such as cash and US Treasuries into risk assets such as stocks and corporate bonds to take advantage of possible double-digit returns."

"The market may give back some but the general trend will be higher as global economies recover due to the overall impact of the colossal tsunami of more than 500 government fiscal packages over the world; 85% of which were in the past six months. Markets will always move before economies, and while there may be some squalls ahead, they are significantly off their bottom by 30% to 40%," says Mr Doll.

He adds that while US equities will move into a correctional phase in the near term, the correction will be marked by sideway action rather than any sharp pullbacks or declines.

Mr. Doll's growing conviction is that the last bottom on Wall Street on 6 March represents the low for the present cycle. "Market breadth and volume have been strong, which suggests that upward momentum has increased to the point that it has become more difficult to derail the markets," he says.

That said, he is not convinced that the US is at the beginning of a new secular bull market since there are still a number of downside risks. However, he believes that stock prices will be higher one year from now than they are today.

The view at BlackRock is that the fourth quarter of 2008 and the first quarter of 2009 may have marked the low points for US economic growth.

"While there remains a risk that American households will want to reduce their debt burden and increase their savings, which could hold back consumption and the overall economy, there is a prospect that we will witness the start of an economic recovery by the end of the year, and that could lead into sub-par but positive growth in 2010," Mr Doll notes.

He also points out that history also suggests that the best time to invest is when the economic conditions looks bad and earnings estimates are bleak. Looking back at a past periods of GDP declines in the US, Mr Doll notes that the S&P 500 has in the past risen by between 8% and 44% over four quarters after each episode of decline (see table).

S&P performance over 4 quarters after GDP declines

"Markets should be invested in when economies are bad. The worse the earnings estimates, the better the market does on the rebound. We should be looking at double-digit returns this time round in my view," he adds.

BlackRock is currently overweighting energy stocks because of cheap valuations amid a tight supply of oil relative to demand. The US investment house also likes healthcare stocks due to their defensive nature and aging populations while information technology, which looks relatively inexpensive is its favourite growth sector.

It is however underweight in utilities which has become expensive. BlackRock is also underweighting financials, which may have seen their bottom but continue to face risks from more capital-raising exercises.

US and emerging markets favoured

Mr. Doll says US stocks are likely to outperform other developed markets as the global economy mounts a slow recovery, noting that policy responses to the credit crisis have been stronger and more rapid in the United States than in other markets.

US stocks, he notes, also tend to have higher earnings predictability and lower volatility compared to most other markets. Together, these factors suggest that both the US economy and US stocks should bounce back faster.

"Among developed markets, we believe US stocks are particularly well positioned. Additionally, non-Japan Asia, with its built-in domestic demand from continuing industrialisation and its relatively recent experience of the Asian Financial Crisis, also presents some attractive opportunities," says Mr Doll.

China remains a key overweight since the massive stimulus programme enjoys good potential for success in offsetting the effects of reduced export demand. In Hong Kong, the property market is showing signs of stabilisation, which is also providing opportunities.

While he has generally a positive view for most Asian markets, Mr Doll sees more downside risks for Japanese equities due in no small part to the recent relative strength of the yen. Japan, he says continues to be plagued by significant economic weakness that has the potential to act as a drag on the markets.