The risk of a hard landing for the American economy next year is remote , according to Mr Bruce Steinberg, Merrill's chief economist. "Our best bet is a soft landing with growth in the United States of 3.3 per cent and global gross domestic product of about 3.2 per cent. We could have a rough landing if growth is below 3 per cent." The 3 per cent figure is a slowdown from this year in which the US economy has grown by 5 per cent. The euro zone will also see a decline in its growth from 3.5 per cent this year to 2.8 per cent next year, Mr Steinberg says. He also sees the euro currency gaining some ground and perhaps ending next year at $0.95 (€1.07). But, in Japan, he believes growth has peaked at this year's 2 per cent and will drop to 1.5 per cent next year. The Japanese yen will also likely weaken to 1.15 to 1.20 to the dollar.
Corporate earnings momentum will also continue to slow around the world. In 1999, earnings growth was 17 per cent; this year it was 13 per cent. While Mr Steinberg sees another strong year for technology, with double-digit growth, he says it will still be the slowest in six or seven years.
Just as the US Federal Reserve may ease monetary policy in the second quarter of 2001, Mr Steinberg says "the risk of recession is low". He expects the European Central Bank will ease monetary policy in the second half of the year and lower interest rates will help financial market performance. Mr David Bowers, Merrill's chief global investment strategist, estimates the Federal Reserve will cut interest rates by 50 basis points. Merrill's strategists advise overweighting portfolios with US stocks because of its historical role as a safe haven and because more big cap quality companies are domiciled in the US. They also go overweight in Europe where growth is slowing at a lesser rate than the US and underweight emerging markets and Japan. "Investors need to be convinced the global cycle will turn up," Mr Bowers says. "We're looking to invest in areas where there has been under-investment in the last few years."
He encourages people to focus on the energy and utility sectors, especially oil drilling and service companies. Merrill's analysts favourite utility stock was Exelon of the US. Mr Richard Bernstein, Merrill's chief global quantitative strategist, says the investment theme for 2001 should be back to basics, with investors looking for stability of earnings growth. He said that good, high quality companies were cheaper now than they had ever been. The sectors people should look at, he says, are consumer staples like food and supermarkets which reliably outperform, drug and healthcare companies and the aerospace/defence industries. "We advise underweighting technology, telecommunications and consumer cyclicals," Mr Bernstein says.
The Internet sector, which has been the poster boy for technology, is down 70 per cent in the year to date, says Mr Steven Milunovich, chief global technology strategist at Merrill. "Enabling technologies are great for consumers but not great for investors," he says. Valuations of technology companies are still not at bargain basement levels except for companies in the semi-conductor, computer services, storage, software and electronic supply chain sectors.
More details are included in Merrill Lynch's study "2001 - The Year Ahead: Global Opportunity and Challenge" which contains analyses and conclusions of the firm's 29 global industry teams.
