Economic prosperity was the focus of the 1992 presidential campaign. Rightly so: As the year grew long, the budget deficit, unemployment, legislative gridlock, and a credit crunch combined to keep a hammerlock on growth. With the election of Bill Clinton, however, hopes ran high. At least initially, the president enjoyed substantial bipartisan support.
Now, nearly a year after the election, hope for dramatic change has worn thin. Even so, deficit reduction measures and the tax hike have combined to create some interesting opportunities in the automotive sector, real estate, and bonds. Other
The recommendations that follow mix blue-chips stocks with bonds, cash, and more speculative selections. Combined, they comprise a core portfolio positioned to take advantage of low inflation and policy proposals that have the greatest chance of surviving the legislative wars on Capitol Hill.
A suggested breakdown for the conservative, wealthy investor in the
At least in theory, the Deficit Reduction Bill means the government has to borrow less. Thus, low interest rates should prevail, sending a reassuring signal to the financial markets that government spending is under control. Some important industries should benefit from low rates.
For example, the automobile industry has found a way to prosper-even during the current economic downturn. Record-low interest rates and assumptions that residual values will remain high have made it possible for manufacturers to entice buyers through attractive lease finance arrangements. So far this year, Dearborn, MI-based Ford, and Chrysler, have enhanced shareholder value by 20 percent and 31 percent, respectively. General Motors despite its problems, also is back in the running.
The industry is expected to get a shot in the arm from NAFTA, which administration officials have vowed to push through in a form not drastically different from the current agreement. By removing trade barriers between the
Now that the budget plan has passed, the focus has again turned to health care. Gloomy prospects and price plunges remain the order of the day, and, yes, there could be some further sell-off. While nearly everyone agrees that annual increases in fat
profit margins are history, companies with something unique to offer will prevail. Whitehouse Station, NJ-based Merck’s recent purchase of Medco, a discount drug retailer, may be a case in point. Recognized as a world-class drug manufacturer with a secure dividend, Merck may have struck a good balance by using Medco’s information technology to market its pharmaceuticals. With pruned profit mar- gins, expanded marketing capability may be a significant part of the fight to remain competitive. Merck shares were recently trading at $311/4, but at that price, they may be a bargain.
Biotech companies sold off in tandem with the drug stocks, and many also are priced at a discount to their true value. But there are some additional factors working Red to Reduction the sector Bill ‘s maintains advantage. The Deficit capital gains tax at a relatively favorable 28 percent. Also, an investment held for five years in a qualifying company will have only 50 percent of the capital gain subjected to tax. Current capital gains rates of 28 percent would mean a top rate of 14 percent for investments in smaller companies. Thus, investors have an incentive to buy smaller companies, and entrepreneurs will be more likely to start them, knowing there is a pool of investment capital to tap.
Even so, biotech remains a volatile business, a fact that’s underscored by Wall Street’s love/hate relationship with the sector. One way to hedge risk is to purchase a biotech fund-prices for most of these are severely depressed.
Fidelity Select Biotechnology, founded in 1985, has posted an annualized average return of 17.25 percent. However, it lost significant value in 1992 and 1993, 10 percent and 14 percent, respectively. Among its holdings are San Francisco-based Genentech and Cor Therapeutics; Cambridge, MA-based Biogen;
Meanwhile, HMOs are likely to dominate under the managed competition scenario Bill and Hillary continue to push. Minnetonka, MN-based United HealthCare is the recognized leader and the most profitable company in the industry. Earnings gains of 33 percent are projected by some analysts for the company in 1993 and 1994.
Coastal Healthcare Group, located in
So-called green stocks also may catch an updraft from
Again, an index fund is a good way to hedge bets among several producers: Rushmore’s American Gas Index Fund, a no-load fund with a low expense ratio, may be an interesting choice. Although fairly new, founded in May 1989, it had a total return of 11 percent last year, and a 1993 six month return of 20 percent. Its assets have jumped 56 percent over 1992, and holdings include Houston-based Enron, Panhandle Eastern, Coastal Natural Gas, and other major natural gas producers.
Among industrial stocks, Oak Brook, IL-based WMX Technology (formerly Waste Management) was a thoroughbred among growth companies before the recession struck. Because of sharp decreases in earnings, it has moved down in class to the cyclical category. The largest company in the environmental cleanup industry, WMX has excellent, innovative technology and strong market position, and it already has begun capitalizing on fast-growing international markets, including those in
Motorola is the leader in worldwide cellular systems. MCI recently formed an alliance with British Telecom, giving MCI capital to upgrade equipment and bypass local companies in accessing long-distance customers. Bell Atlantic’s purchase of Metro One has made it a major player in the cellular industry. At their current prices, these stocks are expensive, and deservedly so, but investors might do well to snap up these companies should their prices falter.
The banking sector is another good bet, though largely on its own merits and not because of any
COMPLETING THE PACKAGE
Outside the stock market, the tax bill bodes well for real estate, partly because some investors in rental property are now entitled to deduct “passive” losses. Pension funds also are being encouraged to invest in real estate through favorable tax treatment, so demand for existing property may increase, pushing up prices.
A final area to consider is municipal bonds, always a sound tax haven, and even more so with the deeper tax bite on the wealthy. While a bet on bonds is always a bet on low interest rates, you always can hedge your investment by choosing intermediate maturities, ranging from five to seven years. High-quality bonds yield 4.5 percent for five-year maturities and 100 basis points more for 15-year maturities.
Municipal bonds provide a greater return for those in higher tax brackets: A 6 percent tax-exempt rate for a 30-year bond for an investor in the 39.6 percent bracket would require an equivalent taxable yield of 9.9 percent.
Bill Clinton’s policies present opportunities for investors willing to take a measured risk. But it will help to have realistic expectations. Double-digit returns were ripe for the plucking in the go-go 1980s. Not anymore.
Let’s just say our
Merry Sheils is president of First New York Equity, a registered investment advisory and financial services firm.