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Bob Doll's 10 predictions for the next decade
03 August 2010
BlackRock veteran Bob Doll predicts the US stock market could achieve annualised returns of 8% over the next decade. Doll, the group's vice chairman and chief equity strategist for fundamental equities, says U.S. equity returns will lead the developing world, outpacing other established markets because of stronger secular growth, more shareholder-friendly management and fewer structural problems. "Many investors want to forget the last 10 years, which featured the two worst bear markets since the Great Depression," Doll says. "We are not likely to see double digit stock returns in the coming 10 years, due to ongoing deleveraging and significant structural problems. But two disastrous market decades in a row is extremely unlikely as well." While the equity market is likely record a positive decade, Doll says investors will need to cope with a larger number of recessions the amount seen over the past 20 years. Doll, who has published a series of economic and market predictions since the 1990s, believes China will continue to grow strongly as an economic and political force. Here are Doll's 10 predictions for the next decade: 1 - US equities experience high single-digit percentage total returns after the worst decade since the 1930s. Doll believes it is reasonable to assume normalised earnings-per-share growth and P/E ratios for the S&P 500 over the next 10 years match their median rates since 1957, resulting in an S&P 500 Index level of 2,034 by the decade's end. It would translate into an annualised price gain of 6.2% and a dividend yield of 1.9%, for an estimated total return of 8.1%. 2 - Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years. "What investors have become accustomed to -- somewhat infrequent recession - is in fact abnormal. Going forward, we will see a more normal occurrence of recession," Doll says. "US consumers are still burdened by high debt levels, the banking system in the developed world remains highly troubled and, as the European sovereign debt crisis shows, the globe is still subject to deleveraging problems. 3 - Healthcare, information technology and energy alternatives are leading growth areas for the US. Healthcare spending levels will almost certainly continue to rise with the aging boomer population, Doll says. Advances in biotechnology, the rise in patient-driven research and an increasing move toward digital healthcare record-keeping are potential growth areas for the healthcare sector. Information technology's impact will be broadened by the sheer growth of new types of computers and entertainment devices, advances in microprocessor speed and capacity, innovations such as cloud computing and the emergence of social networking tools as economic growth engines," he adds. On energy, Doll says development of energy alternatives will be supported by increasing taxes on carbon emissions. 4 - The US dollar continues to be less dominant as the decade progresses. 5 - Interest rates move irregularly higher in the developing world. In the coming decade, the greenback's prominence will continue to fall as increasing debt levels for the United States will likely act as a drag on the dollar's value, Doll says. But he also expects the dollar will remain the world's principal reserve currency. On a related point, Doll anticipates gold prices will remain at elevated levels. "Many have been turning to the precious metal as a form of ‘alternative currency' in the face of uncertainty - a trend we do not believe will be ending any time soon," he says. Also, interest rates globally also are likely to rise with inflation concerns. "Today's accommodative monetary policy, quantitative easing measures and historically low interest rates are collectively working to stimulate demand," Doll adds. "Over the next 10 years, we expect the global economy to gradually transition from deflationary trends to inflationary pressures." 6 - Country self-interest leads to more trade and political conflicts. 7 - An aging and declining population gives Europe some of Japan's problems. Around the globe, as individual economies continue to struggle, politicians will seek to react to high levels of unemployment. "Trade scapegoating" - with associated protectionist measures and trade and political conflict - will be on the rise, Doll says. Europe, in particular, will be beset by structural economic problems and demographic issues, similar to some of the phenomena that have plagued Japan's economy since the early 1990s, Doll adds. "European policymakers have been relatively slow to react to financial crises, with the European Central Bank continuing to raise interest rates through mid-2008 as the credit crisis was emerging and even as asset prices were beginning to collapse," Doll says. "Both Europe and Japan strongly depend on exports for economic growth, making these regions more subject to external shocks and negatively affected by the increases in their currency value that have occurred over the last 10 years." As in Japan, a shrinking labor force will likely hurt Europe too, as the Continent's population ages and birth rates decline. 8 - World growth is led by emerging market consumers. 9 - Emerging markets weighting in global indices rises significantly. Over the coming decades, the United States will remain a global leader in terms of economic power, but it will no longer be the undisputed king, Doll believes. "The global economic recovery that began to develop in 2009 was led by emerging markets, and we expect their leadership to continue through the coming decade," he says. "Private consumption growth in emerging markets is already higher than that of developed markets, wage growth remains high and emerging market population is relatively young and increasingly well educated. "Looking ahead, we expect that domestic demand within emerging markets, rather than exports, will increasingly become a growth driver." 10 - China's economic and political ascent continues. In 2009, China surpassed Germany as the world's largest exporter, and will likely surpass Japan and become the world's second-largest economy over the next year. China is also already the world leader in automotive sales and in steel production and is the largest buyer of US Treasury paper and largest holder of foreign currency reserves. At the same time, China is still only in the initial stages of industrialisation, Doll notes. "The Chinese population continues to grow rapidly; the country has a wide array of available natural resources; Chinese per-capita consumption levels are low, and are likely to rise; and the Chinese government is actively promoting policies designed to further ‘urbanize' the country, encouraging its population to shift away from agriculture and into manufacturing," he says. Published by IFAonline
