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Putnam’s Jeff Knight: U.S. Large Caps, Emerging Markets Best for Investors

Daily Ticker

Economic data from Germany and comments this morning from German Chancellor Angela Merkel are pushing U.S. stocks lower, snapping the two-day gain for the S&P 500 Index.

Merkel said Germany may give more money to the euro zone bailout fund, and data showed that the German economy contracted in the fourth quarter, causing the euro currency to fall to a 16-month low against the U.S. dollar. U.S. stocks rallied to five-month highs on Tuesday, and both the Dow Jones Industrial Average and the S&P are positive for the year. Though Europe, fourth-quarter earnings and tensions with Iran are all key factors weighing on stocks, Putnam Investments' Jeff Knight says now is not the time for investors to underestimate U.S. equities.

"What strikes me about 2011 is how much of a positive outlier the U.S. stock market was," Knight, Putnam's head of global asset allocation, tells The Daily Ticker's Aaron Task in the attached clip. "Double-digit returns are very achievable for the U.S. market this year." He believes 10% to 12% returns are "not at all a stretch."

Knight, who was interviewed after Alcoa (AA) kicked off earnings season this week by beating analysts' expectations, despite posting its first quarterly loss since 2009, is expecting more upward earnings revisions in the fourth quarter.

Even with a bright outlook on U.S. markets, Knight remains somewhat cautious, preferring to stick with more stable, less volatile companies such as Microsoft (MSFT). (Shares of Microsoft slipped Wednesday after the company warned that sales of personal computers will not meet analysts' projections this year). He likes tech and industrials over health care and consumer staples and recommends a "barbell" investing approach to clients -- heavy weighting to U.S. large caps on one end and a focus on emerging markets on the other. Investors fled emerging economies like China and Brazil in 2011, causing their stock markets to lose nearly 20% of their value.

"Emerging markets ought to be leading stocks in the global markets but haven't been because risk aversion has risen," says Knight. "[They] still have that characteristic of being more volatile."

Knight acknowledges that there are many factors that could drive stock prices lower and that Europe continues to lurk in the distance, but for now, U.S. markets present the most -- and best -- opportunities.