Celebrity Analyst Holds Line On Us Forecasts

The Age

Tuesday August 31, 2004

Malcolm Maiden

The US sharemarket has been in a rut since the end of January and is 11 per cent below where Abby Joseph Cohen thinks it should be - but Goldman Sachs' celebrity analyst is holding the line.

Economic growth was slowing in America, but to a pace of about 3 per cent a year that was "consistent with a long period of economic expansion", New York-based Ms Cohen said in Melbourne yesterday during a whistle-stop tour.

Wall Street's S&P 500 Index was idling at just over 1100 points at the end of last week, well off a low of 800 points reached in March last year ahead of the Iraq war, but 4.3 per cent below its 2004 high in February, and even further below Ms Cohen's rolling 12-month target of 1250 points.

Current share prices reflected "some nervousness" about issues including the economic outlook and wild-cards including terrorism. For investors everywhere, "the age of innocence is over", Ms Cohen said.

The risk premium built into US shares had declined from around 90 per cent early last year before the Iraq war to about 65 per cent, but was above the neutral level of 50 per cent, and offered investors some insurance, she added.

On Goldman's modelling, shares in the S&P 500 Index were undervalued on the basis of cautious economic assumptions, including 3 per cent economic growth, a further rise of half a percentage point in US interest rates and earnings growth for the S&P companies of about 7 per cent in 2005.

Possible triggers for a market rally included confirmation that the economy was on a 3 per cent growth path, the US election decision in November and traditional end-of-year liquidity-driven buying.

US companies were also close to finishing audits of their management systems required by America's Sarbanes-Oxley Act, Ms Cohen said. Mergers, acquisitions and other investments might have been held back to simplify the management audit process and could be activated when that job was complete - at year-end in the case of large corporations.

Ms Cohen's optimism will not surprise those who have followed her over the years. Her accurate and generally bullish market predictions made her a star during the 1990s share boom, and she is still a member of Wall Street's tipster A Team, despite prematurely calling the end of the 2000-02 bear market.