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Global domination

Internationally diversified firms should emerge strongly from the turmoil

High levels of market volatility continued last week although US stocks closed on Friday within a percentage point of where they began on Monday. The Dow Jones Industrial Average declined by 0.2 per cent to 13,358, the S&P 500 fell by 0.4 per cent to 1,474 and the Nasdaq Composite climbed by 0.8 per cent to 2,596.

Despite all the turmoil and uncertainty over the past weeks, stocks actually moved roughly 1 per cent higher in August and remain comfortably in the black for the year, with the S&P up by about 4 per cent and the Dow and Nasdaq up by slightly more than 7 per cent.

As we approach the end of the third quarter, investors are beginning to focus on corporate profits in an effort to gauge how well companies have been holding up in the face of the slowing economy and ongoing credit problems. Consensus estimates for Q3 earnings’ growth are around 5 per cent, which we believe may be a tad too high.

Interestingly, a closer look at the estimates shows that internationally oriented companies are trending around 7 per cent growth while domestically oriented firms are closer to 1 per cent, a disparity that underscores why we have had a more favourable view toward multinationals. Full-year earnings’ estimates are now between 8 and 9 per cent, which would require 12 per cent growth for Q4, which we believe is unrealistically high. In our opinion, all these numbers are likely to continue to fall somewhat, which reflects slower rates of economic growth but does not imply a profits’ recession.

Investors’ primary concern remains the credit crunch, how it will impact on the economy and what the Federal Reserve will do to limit its effects. Fed chairman Ben Bernanke gave assurances on Friday that the central bank will work to contain the impact of diminishing credit availability. These statements, combined with the fact that the US economy has been growing at a below-trend pace for well over a year and that inflation remains within the Fed’s implied target range, leads us to believe that it will cut the federal funds target rate on September 18.

A rate cut should help in continuing to ease the liquidity squeeze, which should help stocks to regain sounder footing. However, we are not out of the woods yet, as we do not believe the effects of credit-related problems have been fully felt. We anticipate some more back-and-forth action in the markets but maintain the view that the low on August 16 represents the nadir for the current cycle and stock prices will continue to move higher over the long term. However, we believe the next stage of the bull market will be narrower than that which occurred between 2002 and 2007. Likely winners, in our opinion, will include globally diversified companies, growth stocks and selected commodityand industrial-oriented companies.

Bob Doll is vice-chairman and global chief investment officer of equities at BlackRock


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