NEW YORK: US small-company stocks promise far greater returns than the emerging market equities, former Merrill Lynch investment strategist Richard Bernstein said on Tuesday.
Bernstein, who has reversed his views on the market since 2009, when he was significantly more pessimistic about the economy and US stocks, told an audience of investment managers and financial advisers that the nearly two-year long bull market in US equities has room to run.
“The US arguably may be the world’s most improved economy,” he said, “and US small cap growth and value is the greatest growth story in the world.”
The so-called BRIC markets of Brazil, Russia, India and China have become investment darlings since the global economic crisis of 2008, but recent worries about inflation and the political risk in Egypt have sparked a sharp shift of investment flows out of emerging markets and into developed economies including the US
In the week ended Feb. 2, emerging market equity funds suffered record net redemptions of $4.1 billion, according to Lipper data.
The rotation out of emerging markets should continue, given US small companies are expanding faster than those in emerging markets, Bernstein told the Investment Management Consultants Association conference in New York.
Bernstein runs Richard Bernstein Advisors LLC, which oversees about $100 million.
US small caps at the end of December traded at one times sales, lower than the BRICs, he said.
Small US companies also are estimated to grow much faster: 80 percent per-share earnings growth in 2011 compared with 32 percent in China and Brazil and 17 percent in both Russia and India, he noted.
Overall, more than half of US companies delivered higher-than-expected revenue in the fourth quarter, Bernstein said. So far in the first quarter, that number is 60 percent, he added.
But Bernstein said the S&P 500 index of largest US companies delivered a total negative return of 8.3 percent from 2008 to last year, compared with a 14 percent drop by the MSCI BRIC index.
DENIAL AND ACCEPTANCE Bernstein was a widely watched chief investment strategist at Merrill Lynch before leaving in April 2009, months after the brokerage giant was acquired by Bank of America in a merger spurred by the 2008 financial crisis.
He was also one of Wall Street’s most bearish analysts during the bull market between 2003 and 2007.
Bernstein was voted onto the Institutional Investor All-American Research team 18 times and named to the First Team ” 10 times.
And right now, he says, investors ought to be feeling more confident in the US economy and its listed companies.
Bernstein said bull markets typically go through four phases: from “denial” in the early stages, when bear-bitten investors doubt prices are on the rise, to growing “acceptance,” proceeding to “brave new world” ebullience before peaking and fading into a bear market.
“Right now the US is between phases one and two. Emerging markets are probably between phases three and four,” he said.
The S&P 500 has outperformed the BRIC countries for three years now, “yet nobody is talking about this,” he said.
From the lows of March 2009, US stocks have delivered two straight years of double-digit gains and are moving closer to the 2007 highs. Yet investors, as evidenced by mutual fund flows and brokerage trading activity, have yet to fully embrace stocks as they worry the current rally has gotten ahead of itself.
Bernstein said small-cap stocks comprise the biggest exposure in his firm’s portfolios, while emerging markets has been slashed.
US small caps are, to be sure, more expensive than their foreign counterparts at 34 times trailing-year earnings, versus 19-times in China and 14-times in Brazil.
Supporting his views on US stocks, he said, are the yield curves measuring the spread between short term and long-term bond yields in different markets. The curve is steepening in the US, he said but flattening in emerging markets.
A flat curve typically means investors expect a slowdown in economic growth in a particular market, he said.