Investors in 2014 need to rotate from some of the defensive parts of the equity market into some of the more cyclical, said Andrew Goldberg, Global Market Strategist at JP Morgan Asset Management.
One of the things that JP Morgan keeps track of is the number of countries who have a PMI (purchasing managers’ index) above 50, i.e. manufacturing and services in expansionary territory. The cyclical upturn in the economy is broadly taking hold and it’s time to start rotating from the more-expensive higher-yielding names into the more cyclical sectors, he noted.
Asked if sector rotation is more appropriate for the US since valuations in Europe seem pretty attractive (compared to the US), Andrew said broadly speaking if one looks at the index level (in Europe), they are not as cheap as one would like to see. But there are pockets of deep value that can be exploited in Europe and that’s the key.
It sounds like a self-serving thing to say, but it’s absolutely true. Now that correlations have come down, it’s much more about being selective and about stock selection. Not everybody will get it right. But if one tries to play Europe with indexes, it’s going to be much tougher, he argued.
Asked if there is value in regional sectors or Italian banks, Andrew said there are a couple of opportunities in the banking sector though he can’t give out specific names. With the Asset Quality Review (AQR) and stress-test coming up, there’s going to be lot of volatility there. Opportunities exist to sweep in and pick up some of those names on the weakness. Also, there are some of the technology and industrial names that look attractive on a cyclical upturn play, he observed.
Questioned if he’s concerned about a big correction taking hold when the Fed starts to taper, Andrew said he’s not too concerned. The way markets are pricing right now, it seems they have made peace with the fact that tapering is not (equivalent to) tightening of monetary policy. The Fed is not going to raise interest rates for a long time. Markets now understand that any tapering is predicated on an improving economy, which is good because markets want it to be healthy, he noted.
Asked if he’s concerned about the equity rally witnessed in the last few months because it was not really based on the fundamentals, Andrew said the fundamentals were delivered in 2011 and 2012. Last year there was an all-time record high in earnings, but the macro backgrounds were not strong enough to give the markets the comfort to reward that. This year, things have been a little better. There was the Draghi speech in the middle of 2012 (that the European central bank will do whatever it takes to save the euro) and since then things have settled down. This is the year that the markets finally rewarded those earnings.
The markets hit an all-time record high, but so did the earnings. That said, the markets have come a long way now and there will not be a repeat of 2013 next year. Much more so, growth in the market will be constrained by earnings. So earnings growth will be moderate and (markets) growth will be in strong single digits next year, he concluded.
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