premium in price. Restructuring will be a focus and we’ll focus on companies that offer efficiencies versus top-line growth. We remain cautious on cyclicals. Stock selection will be crucial.
BE: How will the current environment affect bonds?
FRAZIER: The U.S. economy is approaching somewhat of a golden age. It has a lot to do with low inflation, low interest rates, demographics and no real threat of recession in sight. We aren’t really concerned about inflation right now, but our concern has to do with deflation or excess capacity. I believe that long-term bond yields will fall further, going down to a range of 4% to 4.25%, resulting in a lower yield curve.
BE: What about corporate bonds?
HOLLAND: Clearly, corporates will be attractive. But people forget that the more risk you take, the more bonds act like stocks. So when the stock market goes in the toilet, which is what is happening because of all this global unrest, the spreads (the difference between the yields) on [Treasuries and corporates] widen.
BE: What is the outlook for international economies?
HOLLAND: Latin America is more painful to us, in many respects, than Asia. This is an important issue because they are a very large trading partner. The U.S. has another problem. At least on a short-term basis, the U.S. dollar has weakened relative to the Yen, which no longer makes U.S. financial assets as desirable as they once were. The Euro will be a formidable competitor to the U.S. dollar.
I’m bullish on Europe because I think that the stocks are relatively cheap. Europe’s economy will grow faster than the U.S. because they are probably in the third inning of restructuring, downsizing and rightsizing. Actually, from a stock market point of view, Europe is probably more attractive because of the restructuring theme, meaning that earnings will be affected positively by the consolidation and restructuring of major companies.
GOODWIN: We see continued strength in Europe. Our sense is that they’re going to do a series of interest rate cuts. You can see interest rates at 4% in the U.K. moving to 6%. One of the ways that we can make sure that we get Europe exposure is through U.S. companies. In fact, a lot of multinationals that we own are more than 20% exposed to Europe so they’re reaping the benefits. Then you’ve got a lot of U.S. companies that are turning into European companies as they’re being acquired, whether it’s Chrysler being acquired by Daimler-Benz or Airtouch being acquired by Vodafone.
We still see some risk in Asia, but one of the interesting things, through 1998, is that we’re finding [investment opportunities] sector by sector. We’re looking for opportunities to play in Asia as it rebounds primarily through U.S. stocks. We agree that there’s a real risk of recession in Latin America, which has the potential for putting my double-digit S&P growth forecast at risk.
BE: Let’s look at technology. Net stocks drove a great deal of the market activity over the last year. Do Net stocks represent a bubble waiting