Richard Bernstein on bull run: It's 1982 all over again

Famed strategist says U.S. stocks will keep on keeping on; emerging markets passé

Dec 11, 2012 @ 3:51 pm

By Dan Jamieson

Forget the “new normal.” Strategist Richard Bernstein says the best place to invest now is in U.S. stocks and long-duration U.S. bonds.

Domestic equities are in the “midst of a major bull market that could ultimately rival 1982's bull market,” Mr. Bernstein wrote in a report on his 2013 outlook.

His reasoning: continued negative sentiment, low valuations for U.S. stocks and easy money from the Federal Reserve should help U.S. stocks outperform emerging markets next year.

“Honestly, in my entire career, I don't think I've ever seen a period where people are as afraid of equities,” Mr. Bernstein, founder of Richard Bernstein Advisors LLC, said in an interview.

He thinks the rush into emerging markets by investors looking for growth will turn out to be a mistake.

“That's an old story. It's passé. Emerging markets were the biggest beneficiaries of the global credit bubble, because the assets that did best in the credit bubble were emerging markets, commodities, real estate and hedge funds — all credit-related assets,” Mr. Bernstein said.

With the credit bubble deflating, emerging markets will underperform, he said.

That advice runs counter to the “new normal” hypothesis of slow growth in developed countries, which has led advisers to seek returns in emerging markets.

“I think the new normal perfectly explains the last 10 years, not the next 10,” Mr. Bernstein said.

With economies weakening globally, competition among countries to devalue currencies and boost exports would be good for the dollar, he said, and that would make U.S. assets attractive.

And forget about a bond bubble.

Long-term-Treasury rates will continue to fall, based on the “overwhelming negative sentiment toward the long end of the curve,” he said in his report.

“People are now gaga over short-duration funds, but I don't get it,” he told InvestmentNews.

These funds offer yields of 4% or more, but contain economically sensitive mortgage securities or emerging-markets debt, and have more risk than commonly thought, Mr. Bernstein said.

Inflation will remain tame, and gold and commodities will underperform, he predicts.

Mr. Bernstein likes smaller “U.S.-centric” industrial and manufacturing stocks because of closing wage disparities, lower energy and transportation costs, and political stability. Smaller U.S. bank stocks are likely to outperform as well, due to improving household cash flow, stronger housing markets, improving asset values and little exposure to the deflation of non-U.S. credit bubbles.

He sees investors warming up to European stocks in the second half of next year based on easy earnings comparisons, but warns that fundamentals are weakening in Europe.

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