Investments

Published exactly one week after U.S. voters made history by electing Barack Obama President, this month’s timely Research Investment Committee Report (RIC) looks at the potential economic impact of the new administration. In it, Merrill Lynch global economists and strategists discuss which sectors, asset classes and regions may outperform—and underperform—during the Obama years.

Two things bear remembering, says Chief Investment Strategist Richard Bernstein. First, the economic cycle tends to have a more powerful influence on the markets than the political cycle, and, second, increased regulation does not necessarily precipitate a decline in corporate profits. He points to infrastructure, alternative energy and municipal bonds as investments that should perform well under the new political leadership.

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At the beginning of the year, non-U.S. equities and currencies were among the investment themes favored by strategists. Now, however, global growth has slowed. Despite this slowdown — and the financial crisis affecting the U.S. and global economies — encouraging signs point to renewed strength in U.S. investment opportunities. U.S. equities are poised to outperform over the next six to 12 months, says Merrill Lynch Chief U.S. Sector Strategist Brian Belski.

He points to three factors driving this shift: a strengthening dollar; relatively stable earnings and GDP growth in the U.S., compared with international markets; and the increased likelihood of higher volatility in global markets, compared with the U.S. He also offers five ideas for re-entering the U.S. equity market, which investors can use as they reposition their portfolios for a recovery:

1. companies that produce environmental solutions;
2. companies that cater to bargain-hunters;
3. companies that grow through innovation;
4. companies that benefit from reduced commodities pricing; and
5. companies that expand through merger-and-acquisition activity.

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"Since everyone is in a panic, they sell everything, including the emerging market stocks. It’s like throwing the baby out with the bathwater," says Dr. Mark Mobius, Executive Chairman of the investment firm Templeton Asset Management Ltd. Because of this approach, too many investors may be missing an important opportunity, especially with emerging market valuations so low.

Talking with Gary Dugan, Chief Investment Officer of Merrill Lynch's Global Wealth Management, Europe, Middle East and Africa, about the opportunities and risks involved in investing in emerging markets, Dr. Mobius points to the fact that developing countries are growing at a faster rate and hold far less debt than developed nations. They also have the largest foreign reserves in the world. China, in particular, he says, represents opportunity for investors.

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The exceptional measures by the U.S. government and governments around the world will slowly begin to ease the credit crisis and stabilize the markets, says Jim Rothenberg, chairman of the mutual-fund management company Capital Research. But consumers and businesses must first get through the oncoming deep recession, which Rothenberg predicts could last up to nine months.

In this wide-ranging discussion with Bob McCann, vice chairman and president of Merrill Lynch Global Wealth Management, Rothenberg takes viewers behind the news, the rumors and the speculation to offer a clear-eyed assessment of the current difficult economic environment — how investors should react in the short-term, where the long-term opportunities are, and what kind of return investors can expect from equities in the next 10 years.

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