Buy stocks and don't worry about inflation — that's the advice of the chief stock picker of the world's biggest fund firm, BlackRock Inc.
Bob Doll, BlackRock's vice chairman and chief investment officer for global equities, sees the Standard & Poor's 500 stock index rising 10 percent to the 1,250 level by the end of the year.
Doll, who has been putting out annual predictions for 15 years, said U.S. stocks could deliver annual returns of 6 percent to 8 percent over the next decade while recessions become more common.
Emerging markets are likely to outperform developed economies, Doll said, warning that investors should expect gyrations.
"I like to compare emerging economies to teenagers. They are going to become adults ... but it could be a bumpy road," Doll said at a briefing at the mid-town Manhattan headquarters of BlackRock, which manages $3.2 trillion in assets.
Doll expects the U.S. economy to outpace Europe's and Japan's.
He projects that U.S. gross domestic product will grow slightly more than 3 percent this year due to massive government stimulus spending and inventory restocking.
"Inventories alone, which got to depression levels, need to be replenished. That will add at least a percentage point to GDP here," he said.
That growth forecast is below the 5 percent that he said normally follows a recession in the United States.
Emerging markets' economies, measured by GDP, are expected to grow 5 percent this year — boding well for U.S. company earnings. Some 40 percent of the S&P 500's companies' earnings come from outside the United States.
The downside risks for equities include a rapid rise in interest rates combined with extreme weakness in the U.S. dollar due to concerns about budget deficits.
Tax increases, especially on dividends and capital gains, or a spike in the price of oil related to a geopolitical event could also upend the equity outlook.
At the Reuters Summit on Dec 8, Doll said he had yet to start on his predictions and planned to begin tackling them on a plane ride to San Francisco. He typically gathers material for each prediction, building big piles of paper everywhere in his office.
Doll said he favored healthcare, information technology and telecommunications companies over financials, utilities and materials stocks.
"We are at the beginning of the removal of uncertainty over healthcare reform," Doll said, adding that managed care and healthcare services companies are the best bets as they were the "ones punished most by uncertainty over legislation."
Doll was down on financials — banks "are coining money now" but balance sheets remain weak. Doll himself has a big bet on his own firm. He owns about $56 million worth of BlackRock stock, according to ThomsonOne Analytics. So far, so good, as the stock's price surged 73 percent last year.
Doll told Reuters he is still optimistic about commodity prices, including gold, which has eased back from a record high of $1,226.10 in the spot market.
Commodities "have come a long way. If you put a gun to my head I would say they will continue to rise over the next 12 months, but I say that with a lot less conviction than 12 months ago," he said. "I don't think we have seen the ultimate high in gold."
Forget about inflation, Doll said.
"There is excess capacity in virtually everything, manufacturing, labor, and as a result, how are you going to get price increases?"
Labor markets will improve, but the unemployment rate will remain stubbornly high. Doll said he could see U.S. unemployment holding above 8 percent for several years.
But he is expecting benchmark U.S. interest rates to rise from their current historic low range of 0 to 0.25 percent. Doll told the Reuters Summit last month he expected the U.S. Federal Reserve to start raising rates in the third quarter.
"My view is that rates are at emergency levels, and the emergency is passing," Doll said.
And finally, on the predictions themselves, Doll gave himself his best report card in the past 15 years with an accuracy rate of 96 percent for 2009. That compared with his average of 70 percent to 80 percent.
How does he plan to reward himself?
"A kick in the pants," he told Reuters.
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