Pioneer sees value in stocks, junk debt

By Walden Siew

NEW YORK (Reuters) - U.S. stocks should see double-digit gains over the next two years and a rally in the high-yield bond market can extend into 2007, thanks to robust corporate earnings and cash flow, a senior fund manager for Pioneer Investment Management said on Tuesday.

But opportunities for further gains in U.S. Treasuries are limited in the next year, Margaret Patel said.

"Equity is so fundamentally cheap," Patel said at the Reuters Investment Outlook 2007 Summit in New York. "We're now in the presidential reelection cycle; historically those have been good years."

The S&P 500 Index could rally between 12 percent to 20 percent by the end of 2008, according to Patel, who manages Pioneer's equity opportunity fund and its $4.8 billion high-yield fund. She also said junk bonds can continue to offer value.

"I sort of look at both sides of the equation and I'm just amazed to look at where the bond yields are," said Patel, a senior vice president at Pioneer. "I think high yield will be a decent sector in '07."

Junk bonds have returned 11.3 percent year-to-date, outpacing the 3.8 percent return for Treasuries, according to Merrill Lynch & Co. data.

"This year, high yield has definitely performed better than people thought," Patel said. "If rates stay in a trading range and defaults remain low, I think you could see spreads tighten."

High-yield spreads have narrowed to about 302 basis points, from a peak of 373 basis points in January this year, according to Merrill Lynch.  Continued...