|TheStreet.com, Fall, 2014. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
Republicans gained control in the Senate and House of Representatives in the midterm elections, and this augurs real changes that investors can take advantage of.
First, the Keystone pipeline expansion will become a reality. The energy industry has to wait for it to be built, so first to benefit will be equipment and construction-related companies likely to pick up new business. Pick: Caterpillar (CAT – Get Report) .
Second, the corporate tax reform bill has tied to it a teeny-tiny little $150 billion infrastructure stimulus. So when corporate tax reform takes shape it initially will benefit … equipment and construction-related companies. Again, Caterpillar.
Third, fourth and fifth, we can expect that the federal minimum wagewill rise, that the pace of the U.S. dollar’s rise will slow and that the Affordable Care Act will survive. These will have varied effects but clearly will be, respectively, negative for low-cost retailers and fast food companies, positive for European multinationals and positive for insurance companies, pharmacy managers and the like.
Generally speaking, investors can expect a continued rise in U.S. equities as investors around the globe continue to view the U.S. as one of the “safest” places to invest. Although interest rates likely will rise, they will do so very slowly and unevenly in a manner that will not disrupt capital markets.
External factors such as ongoing geopolitical crises will continue to rattle investor confidence from time to time, creating added market volatility. More concerning, these geopolitical events continue to drive the world apart, reigniting the possibility of a new cold war, this time with China, Russia and parts of the Middle-East on one side, and Europe, the Americas and Southeast Asia on the other.
Based on this macro scenario, along with the domestic fallout from an increased minimum wage, slowing dollar and sustained Obamacare, the following sectors and companies are most likely to be beneficial investments over the next 12 to 18 months: large-cap pharmaceuticals, industrials and energy stocks.
Specific picks include Novartis (NVS) , Pfizer (PFE) , Glaxo SmithKline (GSK) , Boeing (BA) , Northrup Grumman (NOC) , Alliant Techsystems (ATK) , Energy Total SA (TOT) , Chevron (CVX) and Murphy Oil (MUR) .
One area that won’t fare so well is financials. Citigroup (C) and Bank of America (BAC) both had to revise earnings after their release to account for extra legal costs. Not a reassuring sign in an environment in which we’re finding plenty of other attractive areas to put our money.
At the time of publication, the author held no positions in any of the stocks mentioned.