Where To Invest For The Next 5 Years

With u.s. equities markets as volatile as ever, where do you go to find growth before the end of this decade? Our expert panelof money managers tells you what will be hot in 2010.

about the market. If you look at the large- cap indices, the Dow Jones Industrial Average, and others, they’ve done OK. But if you look at small caps, midcaps, and some of the isolated industries, like energy, home building, things like that, those have been roaring bull markets.

The industries that everybody watches all of the time are going to struggle the rest of this year. Interest rates will struggle, too. We think some of the mega-cap companies are going to have a tough time growing. When a company makes $3 billion in revenues, 10% is $30 million. It’s hard to do 10% when you get that big. That’s why we’re looking at growth companies. The rest of the market could probably be positive the rest of the year.

BE: You all say the market is going to do well, but where specifically is the growth coming from, and what are possible dangers?

Alston Paige: I run our small-cap value product. That market index, the Russell 2000, has been very strong for the last three years, and I still feel pretty constructive about it. Even though it’s a much riskier segment of the market, the returns have been big. I would encourage investors to take a look at some of the smaller caps and mutual funds, where they can get small-cap exposure in the total portfolio of their investments. Over time, history has shown that small caps outperform large-cap indices.

Phelps: Capital spending is starting to contribute to growth, as companies will have to meet growing demand and start to replace obsolete equipment. Then, I would expect that outside of the U.S., as our major trading partners’ economies start to improve, export growth will also.

I do have concerns about growth. The consumer has been driving large segments of the growth. The real risk for the economy is the consumer. Once you start raising 10-year bond rates, mortgage rates start to go up and, suddenly, people can’t afford the houses they were able to afford last year. The appreciation isn’t there anymore. Consumers don’t mind spending because they feel in the back of their minds that money is there, and the equity is in their homes. The reality is you can’t spend your house. When people sense that things are starting to diminish, in terms of available home buyers and affordable refinancing rates, that will be a major risk for the economy.

Payne: But the problem is trying to predict when the consumers are going to stop spending. That prediction has been out there for a long time. Americans love to spend money.

We’re like 5% of the world’s population, but we propel the entire world economy. I don’t know when we are going to stop spending money. If people start making more money at work and the value of their homes starts to plateau a little bit, they may still continue to spend at the same rate.

Alston Paige: We think the wild card is energy. That’s what could derail the current economic recovery. If oil

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