The U.S. stock market will provide double-digit returns this year, predicts Bob Doll, chief equity strategist at BlackRock Inc., the world's biggest asset manager.
That outlook is predicated on his view that the U.S. economy will muddle through the challenges posed by Europe, and grow by two or 2.5 per cent.
Mr. Doll does not believe that politicians will find a solution to Europe's sovereign debt woes. But, given the sour state of the world and the pessimistic attitude of many investors, the simple absence of any major economic disasters should be enough to bolster U.S. investor confidence and spur an inflow into equities, he said.
He expects the S&P 500 to hit at least 1,350 by year-end. As a result, the U.S. equity market should do better than non-U.S. markets for the third year in a row, he said, though at some point this year emerging market equities could reverse that trend and begin to outperform once again.
Until recently, inflation in emerging markets had been causing policy-makers to raise interest rates or reserve requirements, actions that put a damper on growth. While growth in both China and India is likely to be slower than it was in 2011, the two countries together will be responsible for more than half of the world's economic growth this year, BlackRock predicts. China is expected to account for more than 40 per cent of global growth, India for 15 per cent, and the U.S. for a further 15 per cent.
"Part of our relatively bullish view is that the [U.S.]economy and earnings will continue to advance and the stock market therefore recognizes that, follows that if you will," Mr. Doll said in an interview. "All we're looking for to get to our 1,350 target is a 10 per cent gain, which is sort of six [per cent]from earnings, two from dividends, and a measly two per cent from some valuation or P/E improvement."
There is much talk about the importance of dividends these days, but Mr. Doll suggests that simply buying stocks with a high dividend yield would be a mistake.
"Dividend-paying stocks have never been more expensive compared to the market," he told reporters on a conference call. What he likes are companies with large amounts of free cash flow that they can use to bolster their current dividends, or start paying one if they don't already. What he doesn't like is stocks that have flat dividend yields. They will behave like bonds, and that's not the place to be this year, he suggests.
The cash spent by U.S. companies to raise dividends and buy back stock increased by about 35 per cent last year, but cash as a percentage of profits used for those purposes remains below long-term averages. Cash used for those purposes could grow by another 20 per cent or more this year, topping the record dividend increases and share buybacks of 2007. At the same time, Mr. Doll expects acquisitions will continue given low valuation levels and cash returns.
Also supporting this trend will be moderate growth in the profits of U.S. corporations, likely in the neighbourhood of six per cent, he says. While that's a decent showing it will mean that profits will fail to exceed estimates for the first time since the economy began to recover in 2009.
Asked during the interview how much of a U.S. bias the average investor should have, Mr. Doll said "whatever your norm is, I'd be 10 per cent overweight that."
And his outlook for Canada?
"You're a resource-based economy, and our view is that commodities and resources are likely to be volatile and flattish this year," he said. "That doesn't make me negative on Canada, just a little less positive than I might have been over the last few years."