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Six pros: ideas for today's markets

Global opportunities, cheap energy, Fed moves, and what it means for investors.

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With U.S. stocks rallying in the wake of the averted debt crisis, and earnings and Fed policy coming to the forefront, Viewpoints recently brought together six leading investment professionals for an event in Houston to ask them how they’re approaching this environment.

The panel of experts traded points of agreement—no one expected the economy and interest rates to surge over the coming year—and disagreement, especially on the relative appeal of stocks versus bonds.

See what the experts had to say about the current state of the markets, and their individual ideas on cyclical dividend-producing stocks, shale plays, intermediate-term corporate bonds, European stocks, and more.

A subpar recovery

The global and U.S. economies continue to see gradual improvement, but it’s still a subpar recovery.

BlackRock’s outlook is for modest acceleration next year, with the U.S. gross domestic product (GDP) growing at around 2.5%. We expect the yield of a 10-year bond to be about 3.5% by the end of 2014, and we don’t expect a lot of inflation, at least not over the next 12 to 18 months.

BlackRock expects to see better growth out of Europe, and some stabilization in emerging markets. U.S. consumers will continue to struggle, we think, because some of the issues they face are structural. Many of these headwinds were evident long before the financial crisis, and we think they will continue for the foreseeable future.

Stocks are no longer cheap, but they remain the best game in town. It seems unlikely that they are going to keep posting years of 15% returns—valuations are not as attractive as they were a year and a half ago.

In October, U.S. stocks were trading at around 15 to 16 times earnings. That’s not unreasonable, given the fact that interest rates and inflation are low, but we don’t think the economy will take off any time soon, and margins aren’t likely to expand much more either. This means modest expectations for earnings growth.

Some parts of the U.S. market, like energy, technology, and parts of the industrial sector, look cheaper than others. But other parts of the market—particularly utilities—still look expensive. Utilities tend to trade a lot like bonds. If real rates continue to rise, the valuations of these companies are likely to come down.

We are also very cautious about U.S. consumer companies. People are paying a big premium to own these, but we think the consumer is still struggling.

Look abroad

The fundamentals may look better in the United States than overseas, but the prices are higher. For example, valuations in Europe are cheap. There’s continuing headline risk, but there is some good value in Europe for the long-term investor.

So BlackRock recommends that people increase their international allocation, and that more aggressive investors—people who really have the stomach for the risk—look at emerging markets as well.

You don’t want to buy emerging markets at the same multiple as developed markets, which is what happened in late 2010. Over the past two years, emerging markets have gotten progressively cheaper. Now you can buy them at a 35% discount to developed markets, and in the past that has been a pretty good entry point.

Long-term inflation hedges

Given the state of government finances and the fact that Washington is not addressing long-term fiscal problems, there is some risk of higher inflation over the longer term. With that in mind, you may want to have some long-term inflation hedges in your portfolio, such as energy companies, hard commodities, and physical real estate.

I think the state of the country’s finances also means financial repression is here to stay, which will hold down interest rates for a long time. This means people will have to cast a wider net to generate income. There’s not going to be one substitute for Treasuries—it’s going to take a combination of different things. Consider getting more income from your stock portfolio, investing in infrastructure like toll roads and ports (through exchange-traded funds), holding municipal bonds, particularly if you can buy them on a dip, and considering bank loans, which provide a combination of hedging against rising rates and seniority to protect in the event of an economic downturn.

Related funds

  • Russ Kosterich is chief global investment strategist for BlackRock iShares.
  • Bill Irving manages Fidelity® Inflation-Protected Bond Fund (FINPX), Fidelity® GNMA Fund (FGMNX), Fidelity® Government Income Fund (FGOVX).
  • Ben Fischer is product team lead for the NFJ Dividend Value Fund (PNEAX) and NFJ International Value (AFJAX) investment strategies and product team co-lead for the NFJ All Cap Value Fund (PNFAX).
  • Meggan Walsh is the senior portfolio manager for Invesco Diversified Dividend Fund (LCEAX) and Invesco Dividend Income Fund (IAUTX).
  • John Dowd manages Fidelity® Select Energy Portfolio (FSENX) and Fidelity® Select Natural Resources Portfolio (FNARX).
  • Marc Seidner is a generalist portfolio manager for the PIMCO family of funds.

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The views and opinions expressed by the speakers are their own and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice, and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product.
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The stocks mentioned are not necessarily holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.
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Past performance is no guarantee of future results.
Diversification and asset allocation do not ensure a profit or guarantee against a loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk, inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. While it may seem appealing to look at bonds that offer higher yields, investors should consider those higher yields to be a sign of potentially greater default, and credit and call risk.
Floating-rate loans generally are subject to restrictions on resale and they sometimes trade infrequently in the secondary market, and as a result may be more difficult to value, buy, or sell. The loan might not be fully collateralized, which may cause it to decline significantly in value.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risk, including the possible loss of principal.
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As of August 30, 2013 the NFJ All-Cap Value Fund held the following securities named in this article (percentages indicate the percentage of base market value of the total fund): Cisco, 2.35%, Microsoft, 2.31%, Intel, 1.29%, International Paper, 2.37%, and Ford, 1.33%.
As of August 30, 2013, the Fidelity Select Energy Portfolio held the following security named in this article: Cabot Oil & Gas, 2.19%.
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