“We’re not likely to see double digit stock returns in the coming 10 years, due to ongoing deleveraging and significant structural problems. But two disastrous market decades in a row is extremely unlikely as well.” Doll said.
Doll predicts U.S. equity returns will lead the developing world, outpacing those of other developed markets due to more attractive valuation measures, stronger secular growth, more shareholder-friendly management practices and more serious structural problems in non-U.S. economies. Though stocks will likely record a positive decade, investors will need to cope with a larger number of recessions than they have over the past 20 years, as the frequency of recessions returns to a more “normal” level, Doll believes.
He also believes that, in a global environment where emerging economies will lead world growth, China will continue to grow strongly as an economic and political force.
Here are Doll’s “10 Predictions for the Next 10 Years”:
1.U.S. equities experience high single-digit percentage total returns after the worst decade since the 1930s.
Doll believes it is reasonable to assume that normalized earnings-per-share growth and P/E ratios for the S&P 500 over the next 10 years match their median rates since 1957, resulting in an S&P 500 Index level of 2,034 by the decade’s end (the Index closed at 1,102 on July 30). That would translate into an annualized price gain of 6.2% and a dividend yield of 1.9%, for an estimated total return of 8.1%.
2.Recessions occur more frequently during this decade than only once a decade as occurred in the last 20 years.
Over the past 20 years, the economy has entered recession once every eight years, compared with once every 3.8 years over the past 100 years. Doll believes that over the next decade, recession frequency will be closer to the long term average. Recessions will occur more frequently because the current global recovery is not “synchronous,” due to broad debt and leverage issues. “U.S. consumers are still burdened by high debt levels, the banking system in the developed world remains highly troubled and, as the European sovereign debt crisis shows, the globe is still subject to deleveraging problems,” Doll said.
3.Health care, information technology and energy alternatives are leading growth areas for the U.S.
The health care, information technology, and energy alternatives sectors of the economy are likely to experience significant innovation acting as key drivers for growth in coming years, Doll said. Health care spending levels will almost certainly continue to rise with the aging boomer population. Advances in biotechnology, the rise in patient-driven research and an increasing move toward digital health care recordkeeping are potential growth areas for the health care sector. Information technology’s impact will be broadened by the sheer growth of new types of computers and entertainment devices, advances in microprocessor speed and capacity, innovations such as cloud computing and the emergence of social networking tools as economic growth engines. Development of energy alternatives will be supported by increasing taxes on carbon emissions, Doll believes. “Energy innovation will be driven by the realities of supply — such as diminishing coal availability — and geopolitical issues — much of the world’s oil is controlled by governments unfriendly toward the United States,” he said.
4.The U.S. dollar continues to be less dominant as the decade progresses.
5. Interest rates move irregularly higher in the developing world.In the coming decade, the greenback’s prominence will continue to fall as increasing debt levels for the United States will likely act as a drag on the dollar’s value, Doll said, but he also expects that the dollar will remain the world’s principal reserve currency. “The yen is plagued by Japan’s deflationary environment and the euro remains under tremendous stress as the European economies experience their own debt issues,” Doll said. “At the same time, the dollar is still the most liquid currency available, the market for US government paper remains the world’s largest and the U.S. dollar is likely to still be one of the primary beneficiaries of ‘flights to quality’ that occur during financial crises.” On a related point, Doll anticipates that gold prices will remain at elevated levels. “Many have been turning to the precious metal as a form of ‘alternative currency’ in the face of uncertainty — a trend we do not believe will be ending any time soon,” he said. Globally, interest rates also are likely to rise with inflation concerns. “Today’s accommodative monetary policy, quantitative easing measures and historically low interest rates are collectively working to stimulate demand,” he said. “Over the next 10 years, we expect the global economy to gradually transition from deflationary trends to inflationary pressures.”
6. Country self-interest leads to more trade and political conflicts.
7. An aging and declining population gives Europe some of Japan’s problems.
Around the globe, as individual economies continue to struggle, politicians will seek to react to high levels of unemployment. “Trade scapegoating” -- with associated protectionist measures and trade and political conflict – will be on the rise, Doll believes. Europe, in particular, will be beset by structural economic problems and demographic issues, similar to some of the phenomena that have plagued Japan’s economy since the early 1990s. As in Japan, a shrinking labor force will likely hurt Europe too, as the Continent’s population ages and birth rates decline.
8. World growth is led by emerging market consumers.
9. Emerging markets weighting in global indexes rises significantly.
Over the coming decades, the United States will remain a global leader in terms of economic power, but it will no longer be the undisputed king, Doll believes. “The global economic recovery that began to develop in 2009 was led by emerging markets, and we expect their leadership to continue through the coming decade,” he said. “Private consumption growth in emerging markets is already higher than that of developed markets, wage growth remains high and emerging market population is relatively young and increasingly well educated. Looking ahead, we expect that domestic demand within emerging markets, rather than exports, will increasingly become a growth driver.” As emerging markets become even more significant to the global economy, they also will be an increasingly large part of the global equity market, Doll noted. As an illustration, in 1989, the MSCI All Country World Index included only eight emerging markets, accounting for less than 2% of the index. Today, there are 22 emerging markets in the index, accounting for 12%. These growth trends will continue over the next 10 years, Doll believes.
10. China’s economic and political ascent continues.
In 2009, China surpassed Germany as the world’s largest exporter, and will likely surpass Japan and become the world’s second-largest economy over the next year. China is also already the world leader in automotive sales and in steel production and is the largest buyer of US Treasury paper and largest holder of foreign currency reserves. At the same time, China is still only in the initial stages of industrialization, Doll notes. “The Chinese population continues to grow rapidly; the country has a wide array of available natural resources; Chinese per-capita consumption levels are low, and are likely to rise; and the Chinese government is actively promoting policies designed to further ‘urbanize’ the country, encouraging its population to shift away from agriculture and into manufacturing,” he said. China’s structural problems include an aging population, the ongoing threat of political unrest, and an economy still largely state-controlled and hampered by low levels of innovation. “China’s issues notwithstanding, its growing prominence on the world’s economic and political stage is unlikely to be altered,” Doll said.
Doll suggested several areas of long-term opportunity for investors and their advisers, including overweighting stocks and other risk assets vs. Treasuries and cash; overweighting U.S. stocks vs. other developed market equities; focusing on opportunities in emerging markets; and allocating to better-positioned sectors.
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