By Hans Nordby

What happens when leading market strategists get together to share their views on the market, the economy and world affairs? Real Estate Portfolio was at the Board of Governors luncheon at the 2003 NAREIT Institutional Investor Forum where three top U.S. market strategists discussed these, and other, topics of interest. Following is an excerpt from the ensuing conversation.

On the current market…

“We’ve been telling investors since December 2001, that we were in a trading environment. Investors are going to have to be more tactical in the way they look at the markets. History suggests once you go through a severe correction, it takes time to bring back investors. Quite honestly, we don’t see the ingredients for the next secular bull market. However, that doesn’t mean you can’t make money.”

“...Some of the recent data suggest, believe it or not, that people are starting to think about travel again. Bookings for conferences and sales meetings are starting to pick up again for the second half of 2004. I think we’re looking at an environment of significant pricing power returning to that industry. The last time you saw that was after the back-to-back recessions of 1979, 1980, 1981 and 1982. People haven’t traveled for a whole host of reasons in the past three years and we could be looking at a sustained period of a couple of years of opportunity in the lodging area.”

—Tobias M. Levkovich, managing director and senior U.S. institutional strategist at Smith Barney.

On interest rates…

“In terms of interest rates, my belief is that rates are going to work higher, maybe between 100 and 125 basis points higher. I wouldn’t be surprised to see rates at 5 percent; maybe not by year-end, but certainly going into next year. The stock market can handle higher rates. And while they may put the real estate industry under some pressure, higher rates are generally good news for the economy. So, I think whatever negative experience the real estate industry has as a result of higher costs of doing business will be offset by, hopefully, firmer rentals.

“...I think companies are going to be increasing their dividends (following the passage of the tax bill), but I think REIT yields are going to continue to be attractive. And even if we’re right and fixed income yields are going to increase, I think REITs are still going to do well.

—Byron R. Wein, managing director and senior investment strategist at Morgan Stanley.

On the bull market…

“The bull market is really three courses: the appetizer, the main course, and the dessert. So far, I think we’ve had the appetizer; we’re waiting for the main course. The appetizer is the snap back from an undervalued condition, a snap back from an extremely negative investor sentiment environment that has taken us back now from the low 800s on the S&P, back up to knocking on the door of 1,000. I believe that we will make it above 1,000, but the move from here is going to be more difficult, and it’s going to depend on the main course.

“The main course is what separates a rally in a bear market from a bull market. The main course is the economy starting to contribute in improving the stream of earnings that keeps valuations from getting too extended during this bull market run.

“The dessert will be, once investors realize that, once again, they’ve made a big mistake by yanking all of their money out of equity mutual funds and throwing it into bond mutual funds, which they did throughout 2002 and the beginning of 2003. This is a key juncture right now where we need to see the evidence of an improving economy.”

—Thomas McManus, managing director and chief investment strategist of Banc of America Securities LLC.