A Bull's view of world markets

Buy on the down days, when of the US Fed’s discussion of unwinding QE sends markets into a swoon.

Summary: The next US economic cycle of “non-inflationary growth” is only just beginning, according to US investor the Trust Bull. The US is entering a period of low inflation, coupled to GDP growth of 3-4%, prompting his clients to begin switching from bonds to equities.
Key take-out: Share market falls prompted by the US Fed’s quantative easing statements are a buying opportunity.
Key beneficiaries: General investors. Category: Economics and strategy.

Any overreaction to the US Federal Reserve’s quantitative easing (QE) pronouncements – or, for that matter, any other unexpected curve balls — is a buying opportunity, according to Chris Hyzy, chief investment officer of US Trust. Consider, he says, the 4% sell-off in the days following Fed Chairman Ben Bernanke’s 19 June press conference. Dovish statements by the Fed chief after the market closed just two days ago have subsequently pushed the S&P back above June’s pre-selloff levels.

He is preaching to the choir. Back in May, US Trust released a survey showing the wealth manager’s clients were finally shifting their priorities from “asset preservation” to “asset appreciation.” US Trust, part of Bank of America, has since increased its recommended stock exposure to 51% equities and 21% fixed income. Last May, its call was 42% equities and 28% bonds. Hyzy sees the S&P 500 rising nearly 20%, to 1950, by the end of 2015.

“My advice to clients today is that we are at a major inflection point,” Hyzy explains, “We are switching from a low yield environment in which you could search for high yield and your portfolio would generally outperform.” Now, the market is moving to a rising, albeit low, yield environment, whereby the Fed plans to unwind, what Hyzy calls, “The Great Experiment.” Buying on those down days, when discussions of Fed tapering send the stock market into a swoon, provides a nice entry point for shifting from fixed income to equities. Hyzy further warns, “The interest rate risk of owning fixed income makes equities a better risk-adjusted proposition than adding risk in fixed income.”

But what should a nail-biting investor buy? Although bullish on emerging markets, specifically Mexico and Poland, Hyzy sees opportunity mostly in the stronger underlying economies of the U.S. and Germany. The U.S. equity market is currently valued at 16 trailing earnings, a slight discount to its 100 year market multiple of 17. Furthermore, U.S. corporate profits, he figures, should continue to grow by 5% a year through 2015.

Keeping the US front and center, Hyzy’s core theme is “dividend growers,” stocks with solid earnings growth, rock-solid balance sheets, strong cash flow, and, of course, increasing dividend payouts. We’ve heard this from others, of course. But while financials, generally, stand to benefit from the world of rising interest rates, Hyzy’s dividend theme is focused around technology.

He is hard pressed to see the benefits of an ETF like theTechnology Select Sector ETF which he says is too general in its approach and is bound to dilute the results of the best performers. Hyzy favors instead a “bar-belled” approach: for total return investors should focus on buying the larger, cash rich, dividend growth companies usually found among the software-oriented firms; for growth stocks buy mid-sized cyber security, mobile payment, entertainment and content management and robotics firms.

But back to Hyzy and his worldview. The US Trust bull claims the next US economic cycle of “non-inflationary growth” is only just beginning. He means, of course, low inflation, coupled to GDP growth around its longer-term average of 3% or 4%, all while fiscal headwinds are gradually decreased by the sequester.

And as to the famous Bernanke taper? Hyzy thinks the easy money will be unwound slowly over the next few years, with quantitative easing ending sometime in mid-2014, consistent with Bernanke’s rhetoric Wednesday.

Of course, an exit strategy of this magnitude is unprecedented, so the jury is still out whether U.S. Trust’s clients will remain focused on “asset appreciation” over the long term, or whether the defensive “asset protection” crouch of the bad years will once again become vogue.

This article has been republished with permission from Barron's.

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