Strategists predict stellar year for international equities

Stocks worldwide are likely to rise for a fourth straight year because shares are still cheap given the outlook for economic growth and corporate profits, say strategists at Goldman Sachs.

Forecasts presented at Goldman's global strategy conference in London this week suggested that 2006 equity returns in the United States, the world's largest market, would be the highest in three years. Asian bourses would have the biggest increases, while European markets would gain the least, said the strategists.

"The US stock market is underpriced," said Abby Joseph Cohen, chief US investment strategist and partner at Goldman, the world's third-biggest securities firm. "Economic growth will continue in 2006 and 2007. Corporate profits remain sturdy."

The US Standard & Poor's 500 Index might reach 1400 by the end of the year, Cohen, 53, told the conference. That would be a 12 per cent advance from the December 30 close. US stock returns, including dividends, would be 13 per cent this year, she said.

Chief equity strategist Kathy Matsui said Japan, Asia's largest economy, would deliver equity returns of 14 per cent this year. Asia excluding Japan would provide investors with returns of about 15 per cent.

Peter Oppenheimer, Goldman's head of European strategy in London, said European stocks would return 11 per cent in 2006.

Cohen said US valuations were "supportive" for stocks, with the S&P valued at 15.9 times earnings, less than the average 18.6 since 1950.

Companies in the index might increase profits 6 per cent this year, after 9 per cent growth last year and a 20 per cent gain in 2004, according to Goldman.

Cohen was also bullish at the start of last year, forecasting a 9.3 per cent rise in the S&P 500 for the year.

JPMorgan Chase does not share Goldman's optimism, predicting that the S&P 500 will fall this year because earnings will miss expectations. Abhijit Chakrabortti, the top-ranked global equity strategist in Institutional Investor magazine surveys for 2003 and 2004, has an index forecast of 1125 for this year.

The S&P 500, up 3.2 per cent so far this year, climbed 3 per cent last year and 9 per cent in 2004. The index closed on January 11 at its highest level since May 2001.

Jim O'Neill, Goldman's London-based head of global economic research, said the US economy would expand 3.6 per cent this year.

The predicted growth was faster than the 3.4 per cent average estimate in a survey by research firm Consensus Economics, he said.

Expansion was 3.6 per cent last year, according to Goldman estimates.

Cohen said investors in US stocks should favour industrial and technology firms because they would benefit most from higher corporate spending.

"This is where earnings surprises are most likely," she said.

David Kostin, Goldman's chief sector strategist in New York, wrote in a December 12 report that General Electric, the world's largest maker of energy turbines and jet engines, and Microsoft, the world's biggest software maker, were among stocks that might get a lift from rising investment.

Tokyo-based Matsui said yesterday that Japanese stocks would keep gaining as rising domestic demand bolstered earnings growth.

"We're very positive on Japan, even in a global context," she said. "There is plenty more upside."

- BLOOMBERG