|Minyanville.com, Summer, 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.|
Plus, the best European-based multinationals offer a more attractive yield, better valuation, and stronger growth outlook than their US counterparts.
While a short-term market correction is to be expected, and likely already in progress, there are several key factors that will drive US and global equity prices higher. I’m not a perma-bull who wears rose-colored glasses and is prone to ignore risks. Quite the opposite; my colleagues often accuse me of being too cautious and overestimating portfolio risks — something that has served us well. So, why do I believe the S&P 500 (INDEXSP:.INX) will reach 1,800 within the next six to 12 months? There are five specific catalysts:
1. Global growth is starting to pick up. My firm estimates that global GDP will grow by nearly 4% in the second half of the year, with US growth likely around 2.75%.
2. Despite the possibility of Fed QE tapering, asset purchases and accommodative monetary policy is here to stay — at least for the next few years. As a matter of fact, one could argue that the Fed has already begun to taper asset purchases for the past two and a half months, Fed purchases of Treasury bonds at auction have averaged between 25% and 35% of issuance, roughly half as much as was the case last year.
3. Corporate earnings continue to be robust. For the past three quarters, investors have grown nervous that corporate earnings would disappoint, and analysts and investors have lowered their expectations. This has lead to a consistent two-thirds of companies beating EPS forecasts and nearly 58% beating revenue estimates — a trend that I think is likely to continue.
4. Stocks are still reasonably priced. As a result of the better-than-expected earnings growth, improving profit margins, rising dividend payouts, etc., many stocks are still relatively inexpensive compared to their historical valuations. Markets move from oversold (2009) to overbought (not there yet).
5. There will be an eventual, if not already in progress, rotation from bonds to stocks. I admit, this one is a little weak as there are plenty of areas other than stocks that investors could redeploy their bond holdings to. I believe high-quality dividend-paying stocks are the most likely beneficiaries of this eventual rotation.
For those of you who think I’m nuts for expecting further market appreciation and believe that S&P 1,800 is entirely too aggressive, I remind you that last December (nine months ago), the S&P stood at 1,400. At that time, I wrote about my expectations that it would likely breach 1,500 in 2013, and most thought I was crazy then, too. S&P 1,800 is about 6.5% from current levels — nothing all that extraordinary or much of a reach, if you ask me.
Moreover, disciplined investors who are able to put emotions aside and seek value would be wise to look at some European ADRs right now. Europe continues to improve its fiscal situation and has just emerged from recession. Many of the European-based multinationals offer a more attractive yield, better valuation, and stronger growth outlook than their US counterparts. Companies like Total SA (NYSE:TOT), Nestle (OTCMKTS:NSRGF) and Novartis (NYSE:NVS) are wonderful long-term core holdings in any growth- and dividend-oriented portfolio. Right now however, Europe offers more attractive values; below are some examples:
Although a correction for US equities is likely, it is also likely to be short-lived. Nonetheless, there is a strong case to be made for looking overseas to help reduce portfolio volatility and increase long-term performance. This is particularly true for high-quality dividend-paying stocks, such as the ones above — all of which are components of my firm’s GGFS Dividend Buster Program. While US markets have rallied much further than expected, European bourses have struggled over the past year, creating some attractive valuations. Additionally, given my firm’s expectations of a strengthening US dollar, European companies may gain an earnings edge over US companies. Moreover, the economic picture in Europe appears to be improving, with German industrial production strengthening and unemployment dropping more than expected. Having too great of a US bias and ignoring European blue-chip stocks may prove to be a mistake.