U.S. stocks will rise at least 30 percent in the next 12 months as the cheapest valuations in decades lure investors, according to CLSA Ltd. strategist Russell Napier.
Share prices are “screamingly cheap” on the basis of dividends and corporate profits, he said today at a forum organized by the Hong Kong-based brokerage. Napier’s advice conflicts with recommendations from Christopher Wood, CLSA’s equity strategist, who said at the same event that he’s avoiding American stocks on speculation the American economy is weakening.
“I’m incredibly bullish on U.S. equities,” said Napier, who is based in Edinburgh. “There are still huge profits to be made.”
Share prices already account for the possibility that the world’s largest economy will slide into its second recession in three years, Napier said. The Standard & Poor’s 500 Index is down 8.9 percent since April 23. The gauge’s companies are valued at 14.6 times earnings, near the lowest level since May 2009, based on data tracked by Bloomberg.
Stocks in the S&P 500 yield 6.9 percent in profits, compared with an average interest rate of 3.9 percent for corporate bonds, data compiled by Bloomberg and Barclays Plc show. That’s near the biggest gap since at least 1990.
“You should stay well clear of bonds,” Napier said. He predicts a long-term bear market in Treasuries as the U.S. government tries to pay back its debt. The Bank of America Merrill Lynch U.S. Treasury Master has returned 7.2 percent this year and yields 1.6 percent.
In December 2008, Napier predicted the slump in global equities would worsen as the S&P 500 was still too expensive relative to the cost of replacing assets. The index then tumbled 23 percent to a 12-year low on March 9, 2009. He advised investors to buy Asian equities in June 2009 on speculation the recovering economy would propel share prices higher. The MSCI Asia Pacific Index is up 20 percent since then.
Wood, who was the second-ranked Asia strategist in Institutional Investor’s 2010 survey, is less optimistic on American equities. U.S. home prices will keep declining and households are struggling to repay debt, he said.
“Consumers are exhausted,” Wood said at the media briefing. “The Western world remains in a deleveraging cycle.”
Indian stocks are among Wood’s top long-term bets as rising consumer demand from the world’s second-most populous country drives corporate profits. Gross domestic product in India rose 8.8 percent in the three months through June from a year earlier, the fastest since 2007, the government reported on Aug. 31.
----With assistance from Bryan Keogh in London. Editors: Nick Gentle, Darren Boey.