U.S. stocks seen as best assets for 2007

By Jennifer Ablan

NEW YORK (Reuters) - U.S. stocks, which have played second fiddle to high-returning international equities in recent years, are regaining their glory as the top investment choice for the second half of the year.

A pick-up in U.S. economic growth and persistent weakness in the dollar are among the factors that will help U.S. equities outperform other markets, according to leading strategists speaking at the Reuters Investment Outlook Summit in New York this week.

Foreign stocks, as represented by the Morgan Stanley Capital International EAFE (Europe, Australia, Far East) index .MSCIEA, have been outperforming U.S. stocks, with annual returns of more than 20 percent over the three years ended May 31. The Standard and Poor's 500 Index .SPX has posted annual returns of about 13 percent over the same period.

Abhijit Chakrabortti, global equity strategist at JPMorgan, told the summit that he moved to an overweight position in U.S. equities relative to international equities about a month and a half ago after taking a "quite cautious" stance in U.S. stocks over the last two years.

He shifted his recommendation mainly because of the acceleration in domestic economic growth as well as the weakness in the dollar.

"The dollar's decline was and still is a significant lift to U.S. earnings," Chakrabortti said.

A falling dollar helps U.S. companies that generate a large portion of their revenues abroad. As the greenback weakens, a multinational converts stronger euros, pounds or yen into more dollars. That boosts the company's bottom line and investors' pocketbooks.

Every 10 percent decline in the dollar typically translates into a 3.5 percent earnings increase for U.S. corporations, Chakrabortti said.

He admits the currency's movement was a factor he had not placed much weight on.

"We were pretty damn sure that earnings growth was going to be poor" in the first quarter, he said. Earnings in the first quarter came in at a respectable 8.6 percent.

Chakrabortti said slowing U.S. productivity and an inverted yield curve, as happened earlier this year, would typically imply lackluster earnings growth -- but that was overwhelmed by the greenback's effects. The Treasury market's yield curve is inverted when short-term securities are yielding more than their longer-term counterparts.

Looking ahead, the greenback is expected to remain under pressure.

Despite recent gains in the U.S. dollar, the currency remains in a structural-decline trend, said Louise Yamada, a longtime Wall Street market analyst.

"The dollar is deflating," Yamada, managing director at Louise Yamada Technical Research Advisors, said at the summit. "We are printing it like crazy, because growth led by consumer and government spending leads to a weak currency."

She, too, recommends investors stay overweight in stocks but for reasons other than the drooping dollar. Global growth, most specifically the industrial expansion in Europe, Russia and developing nations, as well as increasing Chinese consumer demand, figure prominently in her thinking.  Continued...