Aberdeen Asset Sells Health-Care to Buy Industrial Stocks – Bloomberg 09-09-14

Salient to Investors:

Martin Connaghan at Aberdeen Asset Mgmt said:

  • Buying industrial stocks with stable revenue and selling health-care stocks as uncertainty about the global economy has caused cyclicals to lag pharma and other defensive stocks by a margin that is too wide to ignore. The outlook for cyclical stocks won’t necessarily change in the immediate future, but there is a lot of bad news and low expectations.
  • Some industrials such as elevator and escalator makers have stable income from contracts that make them less sensitive to global growth.
  • Some industrials are not as cyclical as they appear at first glance if you look at their revenues, because there is always a base level of income and revenues coming from areas that are more stable, regardless of the economic environment.

Worldwide industrial shares are trading near the lowest valuation relative to health-care stocks in more than a decade.

The MSCI World Industrials Index trades at 18 x earnings versus 22 x for the global health-care index, the widest margin since October 2002.

US ETFs tracking health-care have attracted $4.3 billion in 2014 versus $530 million for industrial ETFs.

Read the full article at http://www.bloomberg.com/news/2014-09-09/aberdeen-asset-sells-health-care-to-buy-industrial-stocks.html

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Defensive Trading Undone in $2 Trillion S&P 500 Rally – Bloomberg 07-07-14

Salient to Investors:

  • Rotating into defensive industries has been a losing strategy for the third straight year as personal spending, manufacturing and inflation have exceeded analyst forecasts.
  • The median projection says Q2 GDP grew 3.5 percent.
  • Inflows into health-care and utility ETFs exceed $3 billion in 2014 versus $580 million inflows for tech ETFs and outflows of $3.4 billion for consumer discretionary ETFs.
  • Jeff Korzenik at Fifth Third Bancorp said the jobs report is a clear sign of continued and accelerating economic strength, and says the cyclical leadership in many ways will become more pronounced.
  • Doug Ramsey at Leuthold Group said the very broad move to new highs generally means that the earliest the bull market would top out is 4 to 6 months out at a minimum.
  • Oliver Pursche at Gary Goldberg Financial Services is surprised that the overall risk-off attitude being reflected in fixed-income markets has not caused outperformance in high-quality, dividend-paying stocks.
  • Analysts estimate profits at semiconductor makers to increase 34 percent in 2014 versus 7.5 percent for the S&P 500.
  • Robert Pavlik at Banyan Partners expects a stronger market as consumers grow a lot more confident as the economy starts to show a slight improvement.

Read the full article at http://www.bloomberg.com/news/2014-07-07/defense-trade-coming-undone-in-2-trillion-s-p-500-rally.html

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UBS’s Friedman Favors U.S. Stocks, High-Yield Bonds – Bloomberg 06-28-13

Salient to Investors:

Alexander Friedman at UBS says:

  • What Fed has done is not unexpected and the market reacted because it was ahead of itself. All the Fed was saying was that the US is doing OK, that the data is trending as it should, and that it has confidence that in the future it will be able to unwind QE, which is a positive.
  • Some investors were caught overleveraged in fixed income so there is unwinding of the carry trade. In countries like Australia, India and some emerging markets, a lot of investors hold bonds in local currencies which is a risk so expect significant volatility on the emerging market side.
  • China less a risk than perceived because it is just trying to re-balance and is willing to sacrifice some short-term growth to get control over the credit situation and avoid bubbles.
  • Biggest risk to investors is in misinterpreting the Fed, which creates a buying opportunity.
  • Last week the market saw much of the repricing of the tapering risk and so we won’t see a repeat in September. Assuming we see the positive economic data for the next few months which is necessary for the Fed to begin tapering then the market will focus away from life support and more on underlying growth.
  • Buy where underlying monetary policy will match the underlying  requirement and where there is economic growth: meaning US equities, US high yield equities which are oversold and now offer 6 to 8 percent returns over the remainder of 2103.
  • Wary of gold, which was an emotional trade against currency debasement and so has room to decline further.
  • Wary of emerging markets, including Australia, neutral on Europe.
  • Not yet seen bond money switching to equities as most of the money into equities has come from cash and money markets. We will see a shift from bonds to equities for many reasons, not least the immutable force of  demographics such as the elderly selling fixed income savings over time and there is no yield in them.
  • US high yields with equity characteristics are attractive.
  • Expect tapering around December although market is pricing in September. When it happens, US economic data will be trending positively and rising rates will accelerate the housing recovery story as it will cause fence sitters to buy to avoid the mortgage rates increases. Tapering of $10 billion a month is priced into the market and do not expect to see rates rising until 2015.
  •  US financials and insurance companies are a bet that rising interest rates will help their profitability.
  • The Russell 2000 stocks are more attractive because they have more cyclical exposure and exposure to the recovering US story as opposed to the global story where there is still sub-trend growth. With dividends and share buybacks, stocks offer a 4.5%- 5%  yield in 2013 which is attractive.
  • Long the dollar against many alternative currencies because of recovering economy and the Fed slowly winding down QE.
  • Less optimistic about Eurozone, and short Australia.
  • China rebalancing a good thing as banks have been lending too aggressively and China wants to avoid a credit bubble since shadow banking is such a huge proportion of their credit market. Clamping down on lending means it will be more expensive for companies to borrow so GDP will suffer a little bit. China growth could slow to as low as 7 %  causing more volatility short-term but OK over the longer term. Less concerned about China, which has great foreign reserves and is less reliant on foreigners owning local bonds with risk of money exit, unlike Australia, South Africa and India
  • The emerging market is a decent to good place to have a strategic allocation and you want exposure there for the longer term but short-term there is a lot of volatility.  Most worried about countries who have financed deficits with foreign money so when that money leaves they end up in a scary spiral. Countries like South Africa, India, Brazil.
  • Before the end of the year expect to see re-escalations of crises in the Eurozone for many reasons. The Eurozone periphery is like the emerging market with the same concerns including the unwinding of leveraged positions and volatility. After the German election we won’t see a path to true fiscal integration and banking union but instead a recognition that France is very weak, Germany won’t act alone, and that France and Germany are not acting together. Europe needs true labor reform in countries that are not competitive and that is very difficult
  • France is a concern because it has poor underlying economics and Hollande is weak politically.
  • Biggest concern is Spain, which is too big and quite vulnerable and will enter a program with the troika that will be put off politically until the last-minute after volatility spikes over the next 4 to 6 months.

Watch the full video at  http://www.bloomberg.com/video/ubs-s-friedman-favors-u-s-stocks-high-yield-bonds-p2pzBodIRoqFJMPLPcixdg.html

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Stock Inflows Beat Bonds First Time in 10 Weeks, Citigroup Says – Bloomberg 11-29-12

Salient to Investors:

Markus Rosgen and Yue Hin Pong at Citigroup said EPFR Global reported stock funds this week had their second-largest weekly inflows in 2012 and more than the inflows into bond funds, while US funds reversed an outflow trend and Asia attracted the second-largest inflows this year.

Pong said most economic data have positively surprised, and more people are starting to believe the US fiscal cliff may turn out to be ok. Pong said it would take more time for equities to gain full speed against bonds given lingering issues in Europe and weak global trade.

Global investors say the world economy is in its best shape in 18 months

Strategists at three of the world’s biggest banks are advising investors to buy Asian equities most tied to economic growth after valuations fell and the global economy showed signs of recovery.

Niall MacLeod at UBS  predicts technology, industrial and materials stocks will climb in 2013 as China’s expansion accelerates and fiscal-cliff concerns fade. Jonathan Garner at Morgan Stanley said valuations for cyclical shares are 40 percent lower than defensive equities, including household-products makers. Rosgen said an improving earnings outlook will help lure investors.

Read the full article at http://www.bloomberg.com/news/2012-11-30/stock-inflows-beat-bonds-first-time-in-10-weeks-citigroup-says.html