NEW YORK - Although investors should maintain moderate expectations, those who are willing to dispense with their bear-market fears and do some research should find ample profit opportunities in both stocks and bonds next year, a group of T. Rowe Price Inc. executives said during the company's annual investment briefing here yesterday.
With the stock market nearing the close of its third straight losing year - the worst showing since 1929-1932, when stocks declined for four straight years - it is understandable that so many investors have forsaken stocks for the shelter of money market accounts. But, by allowing that fear to rule them, investors will be missing out on the resurgence of high-quality shares, both in the United States and abroad, T. Rowe Price officials said.
"If you let the market tell you what to do, inevitably you will be wrong," Robert W. Smith, manager of the T. Rowe Price Growth Stock Fund, told journalists at the investment briefing, held at the NASDAQ MarketSite.
Price has done well by not letting the market dictate its moves. Over the 12 months that ended Sept. 30, 71 percent of the company's mutual funds outperformed their peer-group average, said George A. Roche, the company's chairman and chief executive officer.
"It's been a very good time for us," Roche said.
One of the underpinnings of a modest stock market recovery is an improving U.S. economy, which Price Chief Economist Alan D. Levenson said will come about slowly as 2003 begins. But growth will accelerate enough throughout the year for gross domestic product to expand by nearly 3 percent for all 2003, he said.
Continued low interest rates and a minuscule inflation rate also will help fuel a rise in share prices, Price executives said.
Such wild cards as a protracted war with Iraq could negate that forecast.
Even so, "the most likely outcome is that the economy regains momentum," Levenson said.
But with renewed momentum, investors shouldn't expect the stock market to return to the halcyon days of the late 1990s, when share-price gains of 15 percent to 20 percent were viewed as the norm, said Smith, the Growth Stock Fund manager.
That stock market bubble didn't just create unrealistic expectations, it also fostered some terrible trading habits, Smith said. In 1960, investors held a stock an average of eight years. Today, thanks to hedge funds and other frenetic traders, that average has fallen to about eight months, he said.
To once again profit from stocks, investors must revert to a buy-and-hold approach, while understanding that an annual gain of 8 percent or 10 percent is a very good return, and is in line with the long-term historical norm, according to Smith.
Unfortunately, the bursting of the bubble helped create a fear of stocks that accounting scandals at such firms as Enron Corp. and WorldCom Inc. only worsened - and at a time when investors should have been looking to buy, Price executives said.
By some measures, nontechnology stocks as a group are undervalued. With the inventory glut in many industries having been worked off, corporate capital spending will gain speed in 2003, pushing up corporate profits, Levenson said.
With that increase, companies will begin hiring anew, which in turn will boost consumer confidence and consumer spending, he said.
Stock opportunities also exist overseas, said William F. "Chip" Wendler, vice president for T. Rowe Price International.
In Europe, for instance, share prices have dropped to valuation measures not seen since the early 1990s, he said. As a group, European shares trade at a steep discount to their U.S. counterparts.
Some of this valuation disparity is due to worries about European labor problems, weaker boardroom commitments to shareholders and government policies that aren't promoting economic growth. In Japan, stocks remain in a trough because of entrenched issues that won't be fixed soon, Price said.
But many of the companies that are based in Europe, or in so-called emerging markets as South Korea, are actually leading global companies. And their shares may afford investors one means of diversifying internationally while still getting high-quality stocks, Price officials said.
Some examples, according to Wendler: South Korea's SK Telecom is the world leader in next-generation mobile telecom services; Israel's Teva Pharmaceuticals is the world's largest maker of generic pharmaceuticals; Taiwan's TSMC is the world's largest semiconductor foundry.
"It's not about [buying into] winning sectors," Wendler said. "It's about buying the winning companies in those sectors."
Bonds have been big winners over the past year, but some opportunities remain, said Mary Miller, assistant director of Price's Fixed Income Division.
With an economic recovery in the making, the best bets in bonds are probably with corporate bonds, some municipal bonds and high-yield bonds, known more generically as "junk bonds," Miller says.
When the economy improves, defaults tend to decline, giving the prices of riskier bonds a boost.
"People are actually earning negative returns in money market funds," after taxes and inflation are factored in, said Miller, who believes that money will be filtered into the bond market.