Markets & Finance

The Asset Class of '06


We expect equities will make the grade as the asset class choice of 2006, thanks to healthy growth prospects.

Global Insight, a forecasting company, is estimating growth of 3.7% globally in 2006, which should equate to respectable low-double-digit earnings gains (see table below). This profit picture, coupled with what we consider attractive valuations, should drive equities to outperform other asset classes this year, in our opinion.

Savvy investors will keep an eye on p-e ratios, we believe. To be sure, markets were very volatile in the first quarter as the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan grew more hawkish and global interest rates rose. In the second half of 2006, we think foreign exchange trends may favor U.S. investors as we see the dollar weakening against the euro and the yen.

With stocks, investors should span the globe, in our view. We favor a diversified approach to our 65% equity weighting, with 45% dedicated to U.S. stocks and 20% to international issues from both developed and emerging markets.

In the bond realm, we recommend a 20% allocation - the shorter, the better. With the yield curve in the U.S., Europe, and Japan relatively flat, we think investors should focus their fixed-income investments on short-term maturities because there is currently little yield premium associated with longer-dated bonds.

Finally, we believe investors should keep 15% of their portfolio in cash or its equivalents. This allocation, which is higher than average, reflects the lack of opportunities we currently see in the fixed-income arena. Cash-equivalent yields of 4.8% - think six-month Treasuries - are very competitive, in our view, especially when compared with yields on longer-dated instruments with a higher risk profile.

Global valuation measures for 2006


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