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Rise in Dow, S&P
signals shift into large-cap
multinational companies
NEW YORK >> A persistently weak dollar and growing opportunities in China have many portfolio managers predicting that 2004 will be the year of the big multinational stock.
A steady rotation away from riskier small caps and tech stocks and into large-cap value companies has helped drive the Dow Jones industrial average and the Standard & Poor's 500 index to 19-month highs this week.
As those indexes rise, the tech-heavy Nasdaq Composite and the Russell 2000 index, which focuses on small-cap stocks, have turned sluggish. Small stocks are those with market capitalizations -- calculated by multiplying the number of shares outstanding by the price per share -- of between $300 million and $2 billion. Large-caps may have up to $200 billion.
Economic reports show jobless claims are falling and inflation is stable, but many investors are still on the sidelines, waiting to see what the new year will bring.
Experts say blue-chip dividend-payers are more fairly priced than the small-cap and tech companies that have led the rally since March.
"I think that part of the rally is over," said Richard J. Nash, chief market strategist at Victory Capital Management. "Companies with more solid balance sheets and that return cash to shareholders will be the market leaders as this rally matures. We've had the easy part of the gains already."
John Waterman, chief investment officer of Rittenhouse Asset Management, a unit of Nuveen Investments, believes global businesses will reap the biggest rewards next year. Some of the companies he's betting on include General Electric Co., American International Group, Inc. and Pfizer Inc.
"With few exceptions, the top 50 stocks in the S&P in terms of market cap have underperformed this year, and look very attractive," Waterman said. "If 2003 was the year of the small-cap and cyclical, we think 2004 will be the year of the large-cap multinational stock."
Such firms could benefit from the weakening dollar, which hit new lows this week against the euro amid concerns about the U.S. budget and trade deficits. For companies with interests overseas, the exchange rate could translate to a boost in earnings.
Over the long-term, multinational firms are well-positioned to take advantage of opportunities in an expanding China, through sales, outsourcing and manufacturing. GE, which recently opened a technology center in China, did about $1.7 billion in sales last year and has set a goal of achieving $5 billion by 2005.
"Basic materials and commodities-oriented companies whose products are being used to build out the infrastructure of China, putting up roads bridges, cities and sewers ... could be some of the big winners in the next few years," Nash said. His firm is keeping an eye on Dow components like International Paper Co., Alcoa Inc. and Caterpillar Inc.
For smart investors, of course, timing is everything. Dave Caruso, author of the investing guide, "Decoding Wall Street," says what you buy depends on whether your perception of timing is tactical or strategic.
"Most people are thinking, 'I wanna buy the winners,"' Caruso said. "But if you're an investor, you're supposed to be selling high and buying low."
Caruso's eye is on underperforming sectors that have room to grow -- including telecom, pharmaceuticals and food.
"I'm selling certain stocks in the tech area, and some in the metals area, because I think they've moved up dramatically," Caruso said. "I'm looking to put some money in pharmaceuticals because everybody hates them."
Caruso said he's also moving into some international stocks, because when the dollar starts going down, they tend to gain.
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