'The worst is behind us,' Price says in Manhattan

December 02, 1992|By Ian Johnson | Ian Johnson,T. Rowe PriceNew York Bureau

NEW YORK -- Cautious optimism ruled midtown Manhattan yesterday as Baltimore's T. Rowe Price Associates Inc. gave its annual outlook on the economy, investing and the mutual fund business.

The consensus that emerged from the seven top T. Rowe Price managers who spoke at the yearly press briefing and luncheon: The economy will pick up next year but not take off, and mutual fund investing will continue to grow strongly, but buyers will have to lower sometimes unrealistic expectations.

T. Rowe Price President George Collins said investors have continued to flock to mutual funds after discovering that their certificates of deposit were barely paying more than the inflation rate. Last year, 8 percent of households had assets in mutual funds, twice the level 10 years ago.

Still, Mr. Collins said, T. Rowe Price and other investment managers must educate newcomers that risks are involved and that the spectacular rates of return of the 1980s were anomalies. Stocks, for example, returned an annual average of nearly 20 percent, while the historical average is closer to 13 percent. Current investors should expect the lower figure, he said.

The other note of sober enthusiasm came on the economy:

"The far-reaching structural changes in the economy are not over, but it looks like the worst is finally behind us and better times lie ahead," T. Rowe Price Chief Economist Paul W. Boltz said.

Mr. Boltz, who forecasts 2.5 percent economic growth next year, said any surprises are likely to be pleasant ones as it will "begin to feel more like a recovery." Unemployment probably will edge down and inflation stay at about 3 percent.

But the recovery will remain lethargic, he said, because there will be no big spurt of growth, which usually kicks in after a recession for a while before the economy settles into normal growth.

"This time we are saving time by skipping the burst of growth" and moving directly to the average growth rate of about 2.5 percent, Mr. Boltz quipped.

Part of the drag on the recovery is that most U.S. trading partners are slowing down just as the U.S. economy picks up, said David Testa, who heads Rowe Price-Fleming International Inc. While Europe's growth rate will increase from 1.1 percent this year to about 2.0 percent next year, none of its economies will be firing on all cylinders, he said. Likewise, Japan's economy is still digesting its speculative property boom of the 1980s and ,, will not lead world growth.

This does not mean, however, that only U.S. stocks are good investments, Mr. Testa said. While the Japanese stock market looks overvalued, newly industrialized countries in the Pacific Rim such as Hong Kong and Taiwan look to be star performers next year, he said.

But with most big trading partners weak, the best U.S. stocks are small company stocks because small companies generally depend less on overseas business, said John H. Laporte, head of the New Horizon and New American Growth Funds.

Small stocks also look like good picks because the U.S. dollar appears set to strengthen, he said.

One of the few areas already affected by President-elect Bill Clinton's proposed policies is the municipal bond market, which offers tax-free investment to high-income earners worried about

Mr. Clinton's promise to tax the rich.

But not all municipal bonds will be winners under Mr. Clinton's policies, said William Reynolds, director of T. Rowe Price's Municipal Bond Division. Winners include all tax-exempt bonds, big city bonds and infrastructure financing bonds. Losers probably are hospital bonds, which could suffer under Mr. Clinton's proposals to contain health costs, and bonds issued by cities with a high concentration of defense industries.


Growth in real gross national product in 1992 and estimates for 1993.

NATION/AREA .. .. .. .. .. 1992 .. .. .1993

ASIA-PACIFIC .. .. .. .. ..2.7% .. .. 3.5%

U.S. .. .. .. .. .. .. .. 1.9% .. .. 2.8%

Japan .. .. .. .. .. .. .. 2.0% .. .. 2.8%

France .. .. .. .. .. .. ..2.1% .. .. 2.4%

EUROPE .. .. .. .. .. .. ..1.1% .. .. 2.0%

Germany .. .. .. .. .. .. 1.1% .. .. 1.8%

U.K. .. .. .. .. .. .. .. 0.8% .. .. 1.3%

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