Wednesday, 29 October 2014

November 2014 Investment Outlook Preparing for a Year-End Rally

Stock Markets Set Up For Continued Rally

The six weeks from the beginning of September through to mid-October inflicted substantial damage on all major stock markets barring China (Figure 1), with developed markets falling 5-11% and the MSCI Emerging Market index losing 11% over the period. 

1. All Stock Markets Fell from Start-Sept. Except China


Source: Bloomberg

Fears over the strength of the global economy have dominated, with sanctions impacting not only the Russian economy but also those in the Eurozone, including that of the export powerhouse that is Germany. As a result, business confidence in Europe has suffered, putting the brakes on business investment and condemning the Eurozone to a no-growth economy (Figure 2). 

2. German Business Confidence Takes a Big Hit


Source: Bloomberg

However, this quick stock market correction has not taken into account a number of more positive economic trends, including the positive impact of lower oil prices on global consumers. 

Oil Price Plunge Boosts Consumption

The Brent crude oil price has fallen $30 per barrel from mid-June peak to around $85 per barrel currently. Of course, this is bad news for oil exporting countries including OPEC members and Russia. But according to The Economist, if this oil price were maintained, then oil consumers would benefit by paying an oil bill some $1 trillion lower.

The positive effects of this are already starting to be seen through rising US consumer confidence, thanks to retail gasoline prices falling 17% since the end of June to $3.14/gallon now. This should feed through to US GDP growth, heading closer to 3% annual growth based on current encouraging trends in the ISM Manufacturing survey.  

Seasonal Effects Now Turn Positive

In addition, after a turbulent month of October, seasonal trends now turn more favourable from November until the end of April. Historically, the VIX volatility index has peaked in mid-October, and then fallen until Spring-time, a pattern that it is starting to repeat now after touching a 3-year peak of 26 this month (Figure 3).

 3. VIX Volatility Index Calming Down


Source: Bloomberg
    

Prefer Growth to Value: Technology, Healthcare

With the US Federal Reserve edging closer to the end of the current round of Quantitative Easing (QE), this is typically a time to favour Growth as an investment style over Value. 
From an economic point of view, the Technology sector is a growth sector that should benefit from two factors: 

  1. The improving growth in business investment, particularly in IT hardware & software; and
  2. Improving consumer confidence in the crucial Christmas buying season boosting demand for consumer electronics.

Healthcare is a second Growth sector that stands to benefit from the continued growth in healthcare demand from emerging market consumers, and also from the increasing penetration of US healthcare insurance coverage as a result of Obamacare.
     

4. Technology & Healthcare Lead


Source: Bloomberg
        

Where to Focus in November

Aside from remaining convinced that both Technology and Healthcare sectors can move higher still, I believe that global bond yields will remain low for the foreseeable future given the continued savings glut, with investors seemingly unwilling to commit to risky assets and preferring the safe havens of government bonds and even cash. 

But, given that the best predictor of future 10-year returns from government bonds is the current bond yield, the 2.3% on offer in 10-year US Treasuries and the 0.9% offered by German Bunds seems very unattractive, with low-volatility dividend growth stocks more attractive in sectors such as Insurance and even Real Estate.

Finally, the US dollar seems set to continue to strengthen against most other currencies,  given that the European Central Bank and Bank of Japan seems set to do whatever they can to weaken their currencies, while the US Fed is putting an end to QE (at least, for now).
    

5. US Dollar Can Still Recover a Long Way


Source: Bloomberg

1 comment:

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