NEW YORK -(Dow Jones)- There is likely to be a 12- to 24-month window in which risky assets will outperform and the Standard & Poor's 500 index is likely to end the year at 1400, Larry Adam, U.S. chief investment strategist for Deutsche Bank Private Wealth Management said Wednesday.
The U.S. economy has the ability to grow 3% to 3.5% over the next 12 months, as the government seeks to build consumer and business confidence by "throwing a little security blanket" on the economy, Adam said at a briefing to review the company's 2011 capital markets outlook.
Added jobs, the unemployment benefits extension and increased spending by businesses will contribute to the growth of the GDP, he said. "We think this is the year you see genuine growth from the more productive parts of the economy."
In addition, unemployment, at about 9.4% in December, should fall to about 8.8% by the end of the year, Adam said. Inflation has troughed and interest rates should normalize this year, the result of quantitative-easing programs, he said.
A favorable macro-economic environment, robust earnings growth, attractive valuations and corporate and retail flows all bode well for stocks, Adam said. While earnings growth is expected to slow in 2011--with the consensus estimate at 12%--it should still remain above the average seen since 1946, he said.
When investors see their statements at the end of the quarter, they'll start to shift from low-yielding bond funds into more risky assets, such as equity funds, he said. Pension funds, for example, have historically held about 55% of their assets in equities, but now have just 52% invested there, he said. If they were to revert to their historical average, $170 billion would flow into equities, he said.
Deutsche Bank Private Wealth Management expects companies to buy back at least $300 billion in stocks this year and forecasts increased merger and acquisition activity.
As for bonds, Adam doesn't see a bubble. Investors continue to search for yield and the yield of a balanced portfolio--a 50/50 mix of the Standard & Poor's 500 index and the 10-year Treasury yield--is at a 50-year low, he said.
As for municipal bonds, a lot of the concern over defaults and deficits are misguided, Adam said. Gary Pollack, head of fixed-income trading at Deustsche Bank Private Wealth Management, said he sees the trough in the muni marketplace within the next several months. "Overall credit quality will improve, starting sometime in the middle of the year," he said.
Overall, Deutsche Bank recommends a broad asset allocation with a yield overlay. It recommends investors place a slice of their equity portfolio into dividend-paying stocks and a slice of their fixed-income investments into high-yield and emerging-market bonds, said Adam. In addition, it recommends an investment in master limited partnerships that offer exposure to commodities.
Adam said he favors growth stocks over value, noting that earnings revisions are moving upward in the growth portions of the market. There are favorable long-term themes among emerging-market stocks, in which investors can participate through global multi-national companies with growing revenue in emerging markets. In the telecommunications area, wireless stocks offer opportunity, he said. Financial and health-care names as well as automobile manufacturers and oil companies that export to emerging markets also offer room for growth, he said.
In addition, investors may participate in emerging markets through investments in currencies, which tend to appreciate as wealth increases, as well as agricultural commodities, Adam said. "As wealth develops, it tends to increase caloric intake."
Deutsche Bank Private Wealth Management favors "truer emerging markets" than the BRIC nations--Brazil, Russia, India and China. Among those markets are Korea, Taiwan, Israel, Egypt and Peru, Adam said.
Deutsche Bank Private Wealth Management has $427 billion in invested assets globally.
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