As the end of 2019 quickly approaches, tune in to a special year-end webinar, featuring our Chief Investment Strategist Randy Watts and Global Sector Strategist Kenley Scott. They’ll discuss their global outlook for 2020 against the current backdrop of broad strength in global markets and reveal the markets and investment themes they currently favor. Our team of sector analysts will also join to offer their top picks for the coming year.
Author: Kenley Scott
Kenley Scott is a senior equity analyst and sector strategist covering the APAC region and the Energy sector. He is a member of the Global Focus List Committee, which approves all equity recommendations for developed, emerging, and frontier markets. Kenley also writes the Global Sector Summary, part of the Sector Strategy service, which identifies emerging sector strength and weakness across 46 countries every week. After working as a commodities broker, Kenley joined the firm in July 2006. He has a B.S. in Statistics from the University of California, Riverside and also holds a Series 65 securities license.
Global Sector Commentary
Key points:
- The iShares Emerging Markets ETF ( EEM ), which tracks the MSCI Emerging Markets Index, rose more than 3% this week to test November highs.
- Beyond those levels, it is just 1% below what would be an 18-month high. After pulling back to its 200-DMA over the prior few weeks, the gain came at an ideal time to maintain the uptrend that began in August but had been under pressure.
- A major key this week was the improvement in heavyweights China ( Hong Kong ) and South Korea, which joined Taiwan, India, and Brazil in a Confirmed Uptrend.
- We favor pockets of strength in emerging markets like Financials (India, Brazil, China, Thailand), semiconductors ( South Korea, Taiwan ), alternative energy ( Thailand, Brazil ), internet content ( Hong Kong ), and drugs/health services ( China, Hong Kong, Brazil ).
- This aligns well with the top holdings in the EEM, many of which are now showing strength.
- Four of the top six holdings are ‘buy’ recommendations on one of our Focus Lists: Alibaba ( BABA ), Taiwan Semi ( TSM, 2330 TT ), Samsung Electronics ( SGL.KR; 005930 KS ), and Ping An Insurance ( PING.HK; 2318 HK ). Other buys in the top 40 are Mediatek ( MDT.TW, 2454 TT ), Bank Central Asia ( BCA.ID; BBCA IJ ), ICICI Bank ( ICG.IN; ICICIBC IN ), and B3 Brasil ( BMF.BR ).
Global Sector Commentary
Key points:
- Energy was the best performing U.S. sector this week as WTI crude oil prices rallied 5%+ to retake their 40-WMA. Prices are nearing the highs of a wedging formation, a break above which could trigger a trend change.
- OPEC and its partners (including Russia) agreed to cut output by a further 500,000bpd on top of the existing 1.2Mbpd cut. The new cut would be in effect through March 2020.
- The O’Neil Energy sector (WS002) has lagged the S&P 500 by ~27% over the trailing one-year period. This has only been significantly worse in four instances since 1970.
- While we are not necessarily calling a relative bottom right now, for investors that have been underweight the sector and are benchmarked to broad indices like the S&P 500, we think it makes sense to move back toward an equal-weight position.
- A few stocks showing positive A/D signals and relatively better technical include MGY, MTRX, NVGS, OIS, STNG, COP, PBRA, LUKOY, NOV.
Neoen
Key points:
- We recommend buying shares on a breakout from a 10-week stage-two consolidation. Shares rose 2.6% today on 53% above average daily volume to an all-time high daily close.
- Solid fundamental ratings: Composite Rating of 99, SMR Rating of B, and EPS Rank of 99.
- Three-year sales and EPS growth of 62% and 94%, respectively. Forward consensus EPS estimates of 173% for 2019 and 59% for 2020.
- Good technical ratings: RS line rising toward all-time highs, RS Rating of 88, and an A/D Rating of B-.
Global Sector Commentary
Key points:
- The iShares Russell 2000 Growth ETF (IWO) posted a 3.5% gain this week, its largest move in five months. It also broke out of the well-defined range it had been trading in for a little over a year.
- This is not necessarily a sign that the value/cyclical rotation has ended. Both small and large value indices are still outperforming the S&P 500 from September lows, and the Cyclical, Capital Equipment, Financial, and Material sectors are in the top half of performers over the past 13 weeks. More specifically, the big gains for small growth are due to the index’s weighting. Health Care makes up nearly 30%, Industrials make up 20%, and Discretionary makes up 12%.
- Looking for ideas to buy that are profitable, with an RS Rating >65, within 15% of five-year highs, next year EPS growth estimates >15%, and current A/D Rating >10, there are 33 names. A handful include ADUS, PCTY, MODN, CROX, NMIH, BRKS, IPHI, AAXN, BOOT.
Global Sector Commentary
Key Points:
- Health Care is now in the top right quadrant in the sector rotation graphic across all three regions ( Americas, EMEA, APAC ). Countries driving the strength are many of the largest global markets, including the U.S., the U.K., France, Germany, Australia, Japan, Brazil, China, Hong Kong, Spain, Switzerland, South Korea, and Denmark.
- In the U.S., Health Care has lagged for over four years versus the S&P 500. However, on a very long-term basis, is has usually competed with Retail for the top-performing spot. As the Relative Strength turn has just begun, we think the outperformance has room to persist and the time is right to overweight the sector once again.
- In terms of stocks on our Focus Lists, we have 35 stocks from the Health Care sector, the third highest weighting behind Technology (44) and Financials (37). Looking at the past performance of stocks on our buy list, Health Care names have the highest average performance in the U.S. and developed markets and second highest in emerging markets. The names across the lists have average 2019 sales and EPS growth estimates of 22% and 31%, y/y, respectively, and average 2020 EPS growth estimates of 36% y/y.
Global Sector Commentary
Key Points:
- Similar to the U.S. two weeks prior, Japan had a large number of breakouts last week. The 100+ figure was the highest in almost two years and 2.5x the long-term average.
- The setup is very similar to 2015-2017, when the market consolidated for most of two years and the number of breakouts remained low, before it finally shifted bullish in both market direction and the number of breakouts in late 2016.
- Adding fuel to the potential shift currently, breakouts are heavily weighted toward the largest sectors, including Cap Equip, Cyclicals, Tech, Retail, and Health Care.
- Two stocks on our Focus list, SMS ( SMSC.JP, 2175 JP ) and Recruit Holdings ( RHCL.JP, 6098 JP ), have recently broken out from the Cap Equip sector.
Global Sector Commentary
Key Points:
- Similar to market breakouts in early 2013 and late 2016, the sectors leading the way as the market makes new highs are Industrial and Financial. Small caps also led versus large caps, as is the case currently.
- In the previous cases, outperformance held for the first couple of months into new highs. Then, other sectors such as Technology, Retail, and Health Care outperformed over the following couple of quarters.
- It has been around two months of the current rotation, which leaves a likely two to three months remaining.
DSV Panalpina
Key points:
- We recommend buying shares on a breakout of a seven-week cup base today, given DSV’s outstanding fundamental characteristics, including 30 consecutive quarters of sales growth and five-year annual EPS growth of 23%.
- Solid fundamental ratings: Composite Rating of 96, SMR Rating of B, and EPS Rank of 84.
- Good technical ratings: RS line at all-time highs and an RS Rating of 89 and A/D Rating of B.
- Institutional sponsorship has risen for a third quarter to 1,241 funds as of September 2019. Longer-term, the number of funds has doubled over the past four years.
Global Sector Commentary
Key points:
- The Vanguard Total World Stock ETF, which tracks the FTSE Global All Cap Index, broke to a fresh 52-week high this week. It also broke through a level that had acted as resistance on multiple occasions since the index broke down from highs in February 2018.
- Although it remains ~3% off all-time highs, the setup is very similar to that of early 2017 and early 2013, when the index finally made its way back to all-time highs after 20+ months of consolidation.
- With the U.S. market making up around half of the weighting, it is no surprise that the global index is moving out of its long-term range. A majority of sectors are within 2% of 52-week highs. We heavily favor Technology and Financials in terms of sector weightings within our Focus List and additionally parts of Health Care, Retail, and Consumer Cyclical.
- In terms of international markets, our Focus List favors France, Hong Kong, Italy, India, Taiwan, and Brazil.
