HONG KONG Cheap U.S. healthcare stocks should perform well in the next few months now that legislative uncertainty about reform in the sector has been removed, said Legg Mason Inc (LM.N) fund manager Bill Miller.
The U.S. House of Representatives on Sunday approved the most sweeping healthcare overhaul in decades, expanding insurance coverage to almost every American.
"The political benefits of the healthcare reform will come first, and the more painful aspects such as higher taxes will come later, so cheaper healthcare stocks will do better in the next few months," said Miller who oversees the $4.8 billion Legg Mason Capital Management Value Trust.
Miller, who is the chairman and chief investment officer of Boston-based Legg Mason, was speaking at a press conference in Hong Kong on Monday. His views on the market have been closely followed for years because he was the only manager in modern times to beat the Standard and Poor's 500 stock market index .SPX for a record 15 straight years.
Miller said he still owned UnitedHealth Group Inc (UNH.N), the largest health insurer by market value, and Aetna (AET.N) in his portfolio.
TECHNOLOGY, FINANCIALS FAVOURED
Miller said his other top pick, the information technology sector, which makes up close to 28 percent of the investments in his flagship fund, is trading at a very cheap level on a historic basis.
The fund is invested in technology stocks such as IBM (IBM.N), Hewlett-Packard (HPQ.N) and Cisco Systems (CSCO.O) which derive a significant portion of their revenues from outside the United States.
The fund manager reduced its exposure to the sector in its Value Trust from around 30-32 percent by the end of 2009 after the sector rose over 60 percent last year, cutting its holdings in most technology stocks except Microsoft Corp (MSFT.O) in which it almost doubled its stake.
Miller is also bullish on big U.S. financials, such as Goldman Sachs (GS.N), JP Morgan (JPM.N) and Wells Fargo (WFC.N), which he expects will get stronger after the financial crisis owing to less competition in the sector.
"Financials are profitable but still under-earning. Earnings will grow dramatically this year," said Miller.
Miller's fund was burned in 2008 by its large holdings in U.S. financial stocks, which tumbled during the global financial crisis.
The Legg Mason Capital Management Value Trust shed more than half its value in 2008 and staged a partial recovery in 2009, rebounding more than 40 percent as Miller's call on the economic recovery paid off.
"I could have retired at the end of '07," said Miller, when asked on Monday what he could have done differently to dodge the disastrous losses of 2008.
SHORT TERM CORRECTION, LONG TERM GAINS
Miller also said he would not be surprised to see a 3-5 percent pullback in U.S. markets after recent gains, although he maintained the outlook was positive.
"The market was higher for 25 of the last 28 days, so it won't surprise me if we saw a 3-5 percent correction in the short term given how strong the market has been," he said.
Miller said concerns over the sovereign debt situation in Europe, which prompted investors to take risky bets off the table in recent months, will not derail the rally in the equity markets in 2010.
Key indicators such as the LIBOR-OIS spread, the difference between the London Interbank Offered Rate an the overnight indexed swap, was at normal levels at present, suggesting there are no systemic concerns over the debt problems in the euro zone. The spread was very wide ahead of the subprime meltdown in 2007-08.
"The U.S. markets are attractively priced both in the long term and short term," said Miller.