Lord Abbett's Ezrati sees US stocks sleeper class

By Herbert Lash

NEW YORK (Reuters) - U.S. equities could be the surprise asset class next year, especially if the dollar has bottomed and foreigners decide it's time to buy America, the chief market strategist at Lord Abbett & Co. said on Tuesday.

Given that European countries don't want to see the dollar crimp exports, the greenback is unlikely to weaken further, which could be good for U.S. stocks, Milton Ezrati, senior economist and market strategist at Lord Abbett, told the Reuters Investment Outlook 2008 Summit in New York.

Europeans and oil-rich Gulf countries have been waiting for the dust to settle a bit over the subprime mortgage crisis before jumping into U.S. equities, Ezrati said.

"If I'm right on the currency, I think dollar equities will be the surprising asset class going forward," Ezrati said. "We like the market. There's another leg up at least," he said.

The Standard & Poor's 500 Index .SPX, a leading benchmark for the performance of U.S. stocks, could rise to 1,600, which would be "fair value," Ezrati said. A rise to 1,600 would represent about an 8 percent return from where the index closed on Tuesday.

Lord Abbett, which manages about $116 billion in assets, does not have a target date for when 1,600 might be reached, he said.

U.S. stocks extended losses on Tuesday, with the S&P 500 down 2.5 percent, after the Federal Reserve's decision to cut its benchmark Federal Funds rate by a quarter percentage point disappointed investors who had expected a more aggressive reduction.

U.S. large-caps will likely outperform small- and mid-cap stocks going forward. Large-cap stocks are trading at a 10 percent discount to small caps, and their dividend yield is about 1 percent more than small- and mid-caps, Ezrati said.

Analysts' expectations that earnings growth for the S&P 500 -- primarily an index of large-cap stocks -- will be about 14 percent next year is too high, with the earnings growth in the high single-digits more likely, he said.

Regarding beaten down home-building stocks, it is probably too early to buy, he said.

Lord Abbett, however, has been buying financial stocks, a sector that has been battered by the crisis in subprime lending but offers some value, he said.

"It's premature to go in and buy in a big way, but it's interesting to go in and start looking at," Ezrati said.

In general, Lord Abbett favors economically sensitive sectors, including industrials and basic materials.

"Everything is priced relative to expectations. ... They're priced so that they can more reflect the growth in earnings going forward," he said.

As world economic growth slows, "the future movement in commodity prices will not duplicate their exciting past," he said. "People are going to be very disappointed with the appreciation."  Continued...