The Uncertainty ahead...
As we approach year end, there are more factors of concern than there have been during any other time since the great recession. The key word seems to be uncertainty: continued political uncertainty; uncertainty over the FOMC’s lack of interest rate direction, and uncertainty of whether the second longest bull market in history, will head into it’s 8th year. These uncertainties combined with the likelihood of inflation to push higher, will undoubtedly cause confusion as well as opportunity in the months ahead.
Although the media polls have Clinton with a 5 point lead, over Trump, with only 8 days remaining until the election. At Samra Wealth Management, our duty is to act in the best interest of our clients, ignore the media, and concentrate on quantitative data and facts. We remain confident in our prior months consensus, with Clinton’s momentum continuing to rise, and a Donald Trump victory not priced into the markets. A Trump victory would likely cause short-term volatility, which we are not seeing; as Trump loses momentum in both Florida and Ohio. Given our prediction of a Clinton win, it is important to remember a Republican majority in the house and senate, will not make for a significant change in legislation, with a Democratic win. Our research indicates Technology, Healthcare and Industrials will lead sector performance, and we have pulled back from our prior month conviction in Consumer Staples.
With the Federal Open Market Committee missing another opportunity to raise interest rates, it is unlikely we will see a rate increase in November, and we double down on our July prediction of a 0.25% increase in December. An increase in key interest rates would also have an impact on other areas. We recommend decreasing exposure to treasuries, and increasing allocation in TIPS, Insurance Companies, and Banks. As the USD strengthens over foreign currencies, the impact will negatively effect trade, as domestic products increase in price for foreign buyers. As opposed to directly investing in foreign markets, we recommend investing in US companies with strong exposure to foreign markets, limiting the currency risk. Although firms such as Proctor & Gamble, Johnson & Johnson and Pfizer have lucrative foreign sales, they physically sell products in foreign markets. In January 2015, Pfizer estimated that it would lose $2.8B from unfavorable currency swings. The chart below shows: how some big American corporations that get half of their sales abroad reported weak 2015 quarterly results and lowered forecasts for the year, partly because of the impact of a strong dollar.
Alternatively, this risk is, to some degree, manageable: as companies utilize currency hedging as a way to limit these losses. McDonalds Restaurant may be thebest example of a company managing foreign exchange risk, as McDonalds currently has locations in 119 countries world wide, and although domestic sales are on the decline, the fast-food chain continues to see better growth overseas. Although only half of all publicly traded companies with foreign exposure hedge their currency risk, those companies utilizing successful currency hedging strategies stand to gain domestically, from offshore profitability.
As we are well into the second longest bull market run in history, the media barrage of “bursting bubbles” appears to be well over-hyped. “Low, but rising interest rate expectations, modest inflation and a strong dollar are good for stocks”. Given our research we have strong conviction within the following areas:
Healthcare: The healthcare industry is close to all-time low valuations, trading at 15 times earnings, and poised for further growth under a Clinton win. Although fears of drug pricing has recently come under scrutiny with Mylan’s EpiPen, it is unlikely with a Republican leaning Congress we will see any drug pricing reform. As baby boomers continue to transition into retirement, we expect their increasing need of healthcare to further strengthen our view on the industry.
Information Technology: With strong balance sheets, stable earnings and stockpiles of cash, the IT sector is poised for global growth. In our July newsletter, “The Tech Edition”, we focused on 10 areas of IT we expect to see strong growth. Continuing on this theme, we expect digital data, robotics and automation to be the driving force amongst technology: given the increasing need for cyber security, and advancements in automation and 3-D printing. With IT being less sensitive to the dollar, this sector warrants increased portfolio allocation.
Telecom Services: With bond yields continuing to suffer, a rise in interest rates suggest movement out of fixed income, and into equity areas providing reasonable dividend yields. Telecom is likely to provide an increasing yield as we see increases in interest rates, and moderate increases in inflation.
Real Estate: As an alternative investment, real estate tends to have low correlation to the market, making it appropriate for most investor, to help dampen volatility, as the graph below shows. However, this month, real estate was labeled as a stand-alone sector by Standard & Poor’s and MSCI, making it relatively more attractive.
Given the uncertainty in the months ahead, we continue to recommend managed strategies over passive themes. For those investors who are unable to stomach the volatility we recommend an introduction to Alternative Investment’s, as a way to help dampen the volatility, given the low correlation Alternative Investments have with the market.
All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only. This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor
Samra Wealth Management, A Member of Advisory Services Network, LLC