|Minyanville.com, Fall, 2013. This article was written with Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with minyanville.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
A look at the sectors and companies that are likely to benefit from the global economic growth cycle.
Three days into the fourth quarter and investors are growing increasingly nervous that the politicians in Washington, DC, will derail a perfectly good bull market. While I don’t think the shutdown will last past next week, the upcoming debt-ceiling deadline is sure to cause additional anxiety. Investors must ignore this political theater and focus on the market fundamentals, which have actually been improving. While it is true that very recent economic data (e.g., the ADP employment report and ISM non-manufacturing data) has been slightly disappointing, the overall trend continues to be positive, and is in fact accelerating:
US economic growth will likely accelerate to 2.8% in the fourth quarter and should top 3% in 2014 – all the while benefiting from an absence of inflationary pressure.
Corporate earnings growth looks solid as companies continue to benefit from an improving business cycle, historically low interest rates, and a favorable labor market (at least from an employer’s perspective).
While equity valuations aren’t as attractive as they were in 2010 or 2011, they are still attractive – a historically mild PE of 15x puts the S&P (INDEXSP:.INX) at 1,750 by year end and over 1,950 by the end of 2014.
While profit margin growth has decelerated in the past two quarters, consensus expects a renewed expansion in 2014.
Europe’s and Asian economies are surprising on the upside, favoring multi-national and economically sensitive companies.
While I have a high degree of confidence in the data and forecasts above, it is not sufficient to make me want to take a broad S&P 500-like exposure to the market. Rather, I prefer focusing on the sectors and companies that are likely to benefit from the global economic growth cycle (industrials and consumer discretionary shares) as well as high-quality dividend-paying stocks whose profit margins are expanding (technology and health-care firms). Below are some of my firm’s top picks and holdings within our various portfolios:
Industrials: Boeing (NYSE:BA), United Parcel Services (NYSE:UPS), Caterpillar (NYSE:CAT)
Consumer: Coach (NYSE:COH), Nike (NYSE:NKE), Coca-Cola (NYSE:KO)
Technology: International Business Machines (NYSE:IBM), Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL)
Health Care: Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), Express Scripts (NASDAQ:ESRX)
In my view, the biggest headwind to the market and the economy will be a potential change in monetary policy. To that end, as long as politicians continue to be inept and lack the ability to lead, central banks will continue to do what they have to and what they can to support growth.