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Monday, November 04, 2002

Pittsburgh Post-Gazette

Today's Guest: Donald M. Belt, senior portfolio manager, Hefren-Tillotson, Downtown www.hefren.com donbelt@hefren.com

Have we finally put this bear to rest? As is always the case, there exist multiple crosscurrents in the markets that drive short- and long-term performance. The key factors for improved equity performance, in our opinion, are a resolution to the Iraq conflict and improved earnings growth. With valuations at more normal levels, insiders buying, sentiment at depressed levels and volatility historically high, characteristics today are consistent with a bottoming process for stocks.

The main question for investors at this point is not if prices will recover, but when. A recovery in equity prices may be sparked by one or more of the following developments: 1. Clear resolution to the Iraq uncertainty overhanging the markets, which may be in the form of decisive military victory or complete Iraq compliance with U.N. demands; 2. An easing in oil prices, which have been a drag on global economic growth, would serve as a stimulus to the economy and corporate profits; 3. Proactive monetary and fiscal stimulus by the United States and global trade partners such as Japan and the European Union would counter deflationary pressures. This may come in the form of coordinated interest rate reductions, lower taxation and increased government spending.

From a timing perspective, it is important and likely that one or more of these events materialize in the coming months. The rate reductions and huge refinancing wave is sustaining consumer spending for the time being, but the economy needs new sources of stimulus and traction in corporate pricing power.

What sectors or investments look good for the next three to five years? Within the fixed income markets, corporate bonds remain our preference given the significant undervaluation of this sector as evidenced by record yield spreads. Within the domestic equity markets, we favor the following sectors: Energy -- geopolitical hedge, attractive dividends, foreign earnings exposure; Industrials -- attractive dividends, foreign earnings exposure, cyclical recovery from depressed conditions, lean cost structures; Health Care -- demographic trends, attractive valuations, noneconomic dependent growth; Materials -- attractive dividends, foreign earnings exposure, cyclical recovery from depressed conditions, lean cost structures.

While a near-term improvement in the dollar's performance is likely, we believe a weaker dollar will be a multiyear trend that will benefit U.S. investors putting money overseas. In addition, foreign equity and bond markets appear more attractively valued than in the United States. The combination of these factors supports our optimism of foreign equity and bond markets, and particularly the emerging markets.

One critical factor regardless of market sector is that dividends will play an extremely important role in future returns. We anticipate there will be a paradigm shift from the capital gains mentality encompassing the markets today to one of income and cash flow.

Specific names? General Dynamics (GD) Exxon-Mobil (XOM) Caterpillar (CAT) Pfizer (PFE) Capital World Growth & Income (CWGIX) New World Fund (NEWFX)

What should be avoided? Within the fixed income markets: Treasuries. Within the equity markets: REITS, technology, consumer discretionary.