Richardson said he and others at Eaton Vance are “very bullish about the new year.’ However, he suggested investors should stop paying so much attention to smaller capitalization ranges and “come into the safer market,’ such as the large-cap, blue-chip stocks.
“We are rooting for an economic slowdown,’ he said, and an increase in volatility, results of an inverted yield curve. There is likely to be more volatility going forward, he said, also predicting that corporate earnings are going to slow. Richardson predicted that bond returns will remain low, and might remain in the 4-5% range for some time. Therefore, he said, investors will be well served in the equity market, which he predicts will return to the traditional 7-8% historic return.
Back to Blue Chips
Michael Mach, Vice President of Eaton Vance Management and Portfolio Manager of Eaton Vance Large-Cap Value Fund and Eaton Vance Tax-Managed Value Fund, continued on Richardson’s themes, suggesting that this is a good time for all investors to increase their equity exposure, especially conservative investors. “We are very constructive on the markets for 2007,’ he said. “I look at equities as the health food supplement investors need in their financial diet.’ However, it is important for any investor to do his homework and investigate the three Ps of a fund: the philosophy, the people, and the process, Mach explained.
Investing is frequently an emotional decision, Richardson said, and that is why Eaton Vance sells funds through financial advisers, advisers who are in a unique position to know how that particular investor will react.
Looking to 2007, and the prospects for a slower economic environment, Mach predicts a good outlook for large cap, high quality, domestic issues. These are the types of issues favored by conservative investors, he said, which should make it a little easier for those investors to return to the market. Although small cap stocks have bested large caps since 2000, Mach predicts this will shift in 2007. Large cap issues look better because of earnings fundamentals and for valuation reasons.
For the conservative investors, Mach said, “now is a wonderful time to come back to the market.’ Such investors like large cap issues because they are less volatile, he said. Conservative investors also like high quality stocks, and although the best performance has recently been seen in lower quality issues, those at Eaton Vance predict this will change as economic trends start to moderate this year. The last factor that will be appealing to conservative investors looking to return to the equity market is the possibility of better returns in domestic stocks. About $158 billion came into stocks last year, Mach said, and 91% of that was in non-US stocks because they were traditionally performing better. However, “we think this is a good time to discuss a good portion of investments in domestic stocks,’ he said.
Growth for Dividends
Judith Saryan, Vice President of Eaton Vance Management and Portfolio Manager of Eaton Vance Utilities Fund, predicts there will be dividend growth because a “confluence of events is bringing back a focus on dividends and corporate wealth,’ she said. Although dividends were considered “dowdy’ during the tech boom, Saryan commented, there are five factors that will lead to their increased usage:
- demographics and an aging population;
- corporate governance and a focus on the tax rate;
- their influence on total return;
- payout levels; and f
- at corporate wallets.
Despite the expectation that the economy and earnings will slow, those at Eaton Vance still expect to see dividend growth in 2007, Saryan said. Even if the tax rate were to go back to be less advantageous towards dividends, some of the anticipated growth rate would go down, but there are many factors leading to this prediction, so some of it would remain, she said.
The demographic issue is an interesting one, Saryan said. Since 71% of investable assets will be in the hands of retirees and near retirees in 2020, a focus on income will remain front and center. However, the traditional focus of relying on fixed income during that time will not offer retirees the chance to grow their income the way that dividends and equities can. This is an evolving area, Richardson said, and he expects to see more activity in it in the future.
Corporations have much capital on hand, Saryan said, and de-equitization is a very important theme, in which firms can generally do four things: invest in their business, buy another business, do a share buyback, or offer dividends. Since 40% of a stock’s total return can be attributed to dividends, they make it a very appealing thing to do with extra capital, she said. Further, the stocks of those companies that offer dividends tend to outperform those that do not. Therefore, Saryan thinks dividends will become a higher priority for companies looking to deploy cash.