NEW YORK -- Investors who saw their courage rewarded this year shouldn't expect similar returns in 1992, T. Rowe Price portfolio managers said yesterday in their annual outlook seminar here.
For the second year in a row, Price gave a muted outlook for the markets. Last year's forecast turned out to be overly harsh, as almost every segment, from bluest blue chip to the junkiest junk bond, did well, producing large gains for those willing to bet against a bad economy.
Ironically, the biggest beneficiary of the surge may have been Price itself. Sales for Price's equity mutual funds have already broken annual records, and sales for bond funds are approaching all-time highs, said company Chief Executive George Collins.
During the year ahead, Price fund managers suggested that the business cycle will be too slow to provide continued support for a boom in share prices, and too fast to permit the large declines in interest rates that fueled similarly strong gains in the bond market.
It should, however, be good enough to produce uniformly modest returns. Global profits will make a strong recovery, particularly in the United States, even if the recovery is sluggish, said M. David Testa, chairman of Price's international investment arm, Rowe Price-Fleming International.
For equity investors, the most promising region will be Europe, where interest rates have more room to fall and share prices are cheaper. Among the least promising is South American markets, many of which racked up vast gains this year.
Domestically, the rally in share prices for small companies could continue for several years, predicted John H. Laporte, president of T. Rowe Price's New Horizons fund. "There's a long way to go before this cycle is over," he said. Earnings for small companies are holding up better than those of their larger counterparts, and investment interest from major U.S. and overseas institutions is growing.
Gains in the bond market have been particularly striking during 1991. Although the recession has been far more wrenching than commonly predicted, prices for the riskiest bonds, most notably those with the worst credit standing, registered the strongest appreciation. The worst returns accrued to the most cautious area: money-market funds.
Given the low yields available at the moment on money-market investments and the recent poor returns, investors may be "seduced" by the prospect of higher yields on longer-term bonds, said Edward Taber III, director of Price's taxable bond
division. But unlike last year, greater risk would not lead to greater reward in 1992, Mr. Taber predicted. The higher yields on longer-term bonds would be offset by principal losses as interest rates increase during the second half of year, he said. Consequently, both short- and long-term funds may produce returns of only 5 percent to 6 percent.
Similarly, the tremendous returns in 1991 to investors willing to ignore credit risks are unlikely in the year ahead. Average appreciation for non-investment grade -- "junk" -- bonds has been a spectacular 41.6 percent so far in 1991, 28.1 percent for Price's high-yield fund.
"If you told me at this time last year we would have had a worse than expected recession and the junk market would be up 40 percent, I would have thought you were crazy," said Richard Swingle, head of Price's junk fund.
The greatest gains were in the securities with the worst credit ratings, most notably a 93.7 percent appreciation for those rated CCC, or one step above default.
"Everyone hated us last year. I even hated myself," he said. "This year has been wonderful."
Mr. Swingle said returns would be about 11 percent and warned that major participants in junk bond markets of past years, such as insurance companies and thrifts, are now out. If the market were to decline precipitously, there's a question of whether any buyer of last resort would remain to provide support.