US bull run has further to go in 1994

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The Independent Online
IT WAS a year in which the mighty fell - both seemingly invulnerable food, drug and tobacco giants and chief executives of some of America's largest corporations - and the media merged.

Some dollars 70bn worth of communications and entertainment shares will change hands as a result of five media deals alone in 1993, helping to push US share averages to new heights. This was in spite of the collapse of some of the country's best-known consumer brands, executive purges at the likes of IBM, Kodak, Apple and American Express, worries over the Clinton health reform plan and the spectre of rising interest rates early in the new year.

Thanks to low rates, more than dollars 100bn in mutual-fund money alone poured into shares in the first 10 months of the year, raising price-to-earnings ratios close to record levels. This has prompted dire predictions that after 38 months, the bull market is due for a significant correction, if not a crash. And yet the US markets have lagged behind, with American prices up only about 7 per cent against 17 per cent globally. Many Wall Street strategists believe US shares have some way to go yet, with stronger corporate earnings expected from faster economic growth.

While companies in consumer products have suffered this year - drugs were the worst-performing shares in the Standard & Poor's index, with tobacco not far behind - the 'second stage' bull market is beginning to reward basic industrial products like papers, chemicals and construction materials.

In an expanding economy, cyclical sectors like cars and airlines are expected to prosper. Both Ford and Chrysler figure prominently in the lists of 1994 stock-pickers, along with American Airlines, which has been laid low by fierce competition, four years of decline in the travel market, and more recently a strike. Media groups dependent on advertising stand to benefit, as do business technology companies. The computer industry is only just emerging from a brutal shake-out - led by the apparent turnaround of IBM - and Compaq, Intel, Motorola and and Microsoft are also widely touted.

A rebound in health care depends largely on politics, although more deals like the dollars 6bn takeover of Medco Containment by Merck this year are likely to inspire speculative interest in the field. Telecommunications takeovers are expected to continue apace, with deals rivalling Bell Atlantic's dollars 32bn merger with Tele-Communications Inc and the dollars 10bn battle over Paramount.

Even the more pessimistic market economists predict total returns for US shares of at least 11 per cent in 1994. Interest rates will have to rise considerably before savings accounts and bonds can match these returns.

The bigger worry for the US markets, says Robert McCabe, chief market analyst at Merrill Lynch in New York, is the amount of American investment that continues to drain offshore. The latest figures, he notes, suggest that 40 per cent of the money ploughed into mutual funds is now being routed overseas.

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