NEW YORK, Dec. 6, 2000—In a global economic report released today, Merrill Lynch suggested that utilities and the energy sector should remain strong in the despite a slight overall slowing of economic growth in 2001.
These forecasts were issued in a study "2001 - The Year Ahead: Challenge and Opportunity," which summarizes the opinions of the firm's more than 900 analysts, economists and strategists around the world.
Strongest among the utilities for the U.S. are oil drilling and service companies, the report said. In Europe, the best sectors are oils, financials and selective defensives, according to the global equity investment staff.
"The investment theme for 2001 is 'B2B,' but this time it stands for 'back to basics,'" said Richard Bernstein, Merrill Lynch's chief quantitative strategist. "Instead of the fastest earnings growth, we suggest investors look for good old-fashioned basics like stability of earnings growth."
Bernstein suggests U.S. investors overweight consumer staples, health care, high quality financials, aerospace/defense, utilities and energy. He recommends underweighting in technology and telecom.
Chief market analyst Richard McCabe said: "We would continue to favor gradual accumulation in the old economy, value, mid-to-small cap sectors of the market. Many of these companies may prove to be the beneficiaries of the `new economy' technologies."
Value investing has not done well during the past five years (1995 through 1999), but it has started to outperform growth investing this year and we believe it will be likely continue to do well over the next several years, McCabe added.
While a lot of the world was focused on technology in 2000, the rest of the global marketplace was doing what it normally does, said Jeanne Terrile, director of strategic research.
"Investors will find surprising solace in our recommendations," Terrile said. "Our 2001 report identifies quite a few themes that go against conventional wisdom and will be interesting to watch as the year progresses."
The themes that Merrill Lynch analysts and strategists recommend for 2001 are more defensive groups: pharmaceuticals, aerospace/defense, utilities, food, real estate and tobacco. These groups had the "oxygen sucked out of them," Terrile said, because investors saw them as dull compared to technology. For 2001, they look more promising because of a greater certainty of bottom line growth.
General Findings
In general, economies globally will grow, but that growth should be slower, said Merrill Lynch chief economist Bruce Steinberg. The global gross domestic product (GDP) is expected to rise to 3.2%, which is down from 2000, but stronger than in 1998 and 1999. In the U.S., GDP should reach 3.3%; in Europe to 2.8% and in Japan only 1.5%.
Oil prices should decline, he said, and inflation will be subdued.
"We expect the Fed to ease U.S. monetary policy, dropping the Fed funds rate to 6%," Steinberg said. "The risk of recession is low."
To deal with slower growth, investors should maintain a defensive stance until central banks have eased sufficiently to turn economies around, said chief global investment strategist David Bowers. The Merrill Lynch global equity portfolio is overweight in European equities, neutral on the U.S., and underweight in Japan and emerging markets, he said.
"If the Fed eases and prospective earning growth improves, equity returns should rise," Bowers said.
More details are included in the Merrill Lynch study "2001 - The Year Ahead: Global Opportunity and Challenge," which contains analyses and conclusions of the firm's 29 global industry teams and a list of stock recommendations.
For more information on Merrill Lynch, go to www.ml.com.
