Market prospects viewed as favourable for 2004

(January 8, 2004) The investment world has changed dramatically in the last 12 months, with economies improving and stock markets rebounding. There’s a tug of war between optimists and pessimists regarding the outlook for 2004, says a top U.S. mutual fund executive.

The plusses appear to outweigh the minuses in the year ahead, suggested Bruce Johnstone, managing director and senior investment strategist at Fidelity Investments, in a conference call with advisors this morning.

Interest rates have stayed lower for longer than anyone expected, capital spending is ramping up and productivity has been “awesome,” said the veteran fund industry executive, who began his career with Fidelity in the 1960s and ran the Fidelity Equity Income Fund from 1972 to 1990.

Corporate earnings have also improved, a trend Johnstone expects to continue this year, predicting double-digit growth, and inflation remains “surprisingly benign.”

“Economic growth is improving worldwide, especially in Asia and particularly in China, which has performed beyond anyone’s dreams,” he added.

The declining American dollar has been a huge plus for corporate profits in the U.S., although he noted the opposite is true in Canada: “This is a hugely negative factor for Canadian corporations.”

And there are some storm clouds on the U.S. horizon as well. Johnstone notes that American consumer spending, which continued unabated during the recession, could slow down, with debt levels at record highs and saving rates at record lows. “Low interest rates are less of a stimulus,” he said.

Other risk factors in the U.S. include unemployment, corporate governance issues related to the recent mutual fund scandals and the impact of a lower U.S. dollar on the domestic front. “A weak U.S. dollar is inflationary and will hurt valuations,” Johnstone said.

For his own retirement portfolio, Johnstone has 25% U.S. equities, one-third non-U.S. equities and one-third high-yield junk bonds, with the remainder in other investments such as gold and cash.

Johnstone has slightly reduced his exposure to U.S. stocks compared to last year. “You have to take the depreciation of the dollar into account, so it makes sense to be invested in non-U.S. equities.”

For those investors worried they may have already missed the stock rally, don’t panic, Johnstone says. “I still think cash is trash, certainly from an investment point of view because you’re getting such low interest rates.”

Johnstone believes his own portfolio will generate long-term returns of 5% to 10%. “That’s a heck of a lot better than what you’re getting in cash. You do want to have some cash and fixed income because of the negatives I have outlined, but generally speaking, get invested.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com