Worst Of Credit Crisis Over: BlackRock

Source : The Business Times, June 10, 2008

US offers earnings predictability and is attractive value-wise

BlackRock Investment Management vice-chairman Bob Doll believes the US market has seen the worst of the credit crisis, although the process of de-leveraging is expected to continue for another two to four years, which will be an economic headwind.

According to Mr Doll, the market hit bottom in mid-March when equity markets hit a low. 'That's the constructive part,' he said. 'The cautious part is that it doesn't mean that we go straight up from there.'

Mr Doll spoke to journalists yesterday during a brief visit to Singapore. BlackRock is one of the world's biggest publicly traded investment management firms, with assets under management of US$1.36 trillion at end-March.

In America's favour are stimulative fiscal and monetary policies taken to cushion the impact of the credit crunch, including successive cuts in the Fed funds rate and a tax rebate. In addition, a weak US dollar is helping exporters.

The latter, said Mr Doll, is helping some companies post double-digit earnings growth, even though US growth has slowed.

'We're in a period of zero to 2 per cent real growth in the US as far as the eye can see,' he said. 'It's not below zero but not at trend level either, which will be very frustrating.'

In a balanced portfolio, Mr Doll said, BlackRock is slightly overweight on equities, slightly overweight on cash and underweight on fixed income. In the year to date, the US market has outperformed - it had fallen in value by 4.3 per cent as at June 2, against a 9.7 per cent fall in Asia ex-Japan equities and a 9.8 per cent drop in Europe ex-UK equities.

'Most investors are underweight on the US, and ask why the US is doing better,' Mr Doll said. 'This is an environment where you would want to upgrade the quality of your portfolio.'

The US, he said, offers predictability of earnings and is attractive from a valuation point of view. BlackRock is underweight on Europe.

On emerging markets, Mr Doll said: 'Where we have the luxury of a long-term horizon, we retain a slight overweight. But we're slightly underweight on concerns about inflation.'

Still, developing markets are expected to continue to outperform mature markets.

BlackRock is also turning more positive on China. 'We're warming to China,' Mr Doll said. 'We've seen a massive decline in that market and growth slowing modestly. The equity market deserves attention.'

BlackRock is 'long-term bullish' on hard and soft commodities, thanks to a supply and demand imbalance, he said. 'In the short term, hard commodities, which have been in a bull market longer, have got a bit ahead of themselves.'

He said that the US economy 'was not, is not and will not be' in recession and the S&P 500 should finish 2008 'slightly higher' than today. But the big caveat on these projections is that oil and food prices should 'level off'.

'For a reasonably constructive outlook to come through, we need to see some levelling off of commodity prices. The world can accommodate US$180 to US$200 (per barrel) oil if we have plenty of time to get there,' Mr Doll said.

'If commodities continue to move up at the pace we've seen of late, all bets are off. The US will be in recession, and the world in a noticeable slowdown.'