In this week’s webinar, Chief Investment Strategist Randy Watts and Director, Research Analyst Kenley Scott will discuss the recent return to highs in the U.S. market at the onset of the Q3 earnings season as well as the forward implications of another short-term stylistic rotation into value stocks. They will also analyze the improving picture in Europe and Japan and favored emerging markets India, Brazil, Taiwan, and China.
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 Markets Update
Key points:
U.S. Market
• Rally to highs and broadening (cyclicals, financials, industrials, small cap) a positive but still not a clear turning point. Last two earnings seasons had similarly positive beginnings before fading.
• Looking for highs to sustain through earnings season and higher breakout totals.
Global Markets
• Relative strength improvement in international benchmarks. Still short term, however, as these indices test key resistance.
• Leading markets include France, Germany, Switzerland, Japan, China, India, Brazil, and Taiwan.
Global Working Themes
• U.S. discretionary; U.S., Europe, and APAC Semis; U.S., Europe, Japan industrials; EMEA/Hong Kong Health Care
• Emerging Consumer and Financial
• China Health Care and Staples
Global Sector Commentary
Key points:
The U.S. market’s setup is very similar to the first two weeks of the past two earnings seasons by several different measures.
- Each of the indices were very similarly positioned, including the S&P 500, which made new all-time highs in late April and late July.
- Financials, which kick off earnings season with a higher proportion of reports, rallied after reporting broadly better-than-expected through the end of April and the end of July. Money centers did make a new high in each case but remained below a channel line. Regional banks made lower highs in both cases.
Global Sector Commentary
Key points:
U.S.: money center banks, semis, building/products, med-tech, and Retail (discount, auto, apparel). Top picks include LULU, ENTG, and TJX.
Developed APAC: Japan taking over leadership from Australia. Sectors working include outsourcing, Health Care, some Retail (drug stores, some apparel). In Hong Kong, Health Care is the clear standout. Top picks include Fast Retailing ( RETA.JP ) and Hansoh Pharmaceutical Group ( HANP.HK ).
Emerging APAC: Taiwan/Korea semis, India banks and consumer, and Thailand consumer loans and alt energy. Top picks include Taiwan Semi ( TSM.TW ) and Hindustan Unilever ( HDL.IN ).
LatAm: Brazil back at all-time highs. Best areas are insurance, real estate development, apparel, and leisure service. Top picks include IRB Brasil ( IRB.BR ) and Lojas Renner ( LE3.BR ).
Equity Research
Global Sector Commentary
Key points:
- Looking across key global benchmarks, a major similarity is the clearly defined levels of resistance that each has been unable to break through for many quarters. After strong Friday gains, each is approaching another test of respective resistance levels once again.
- VT Global ETF has failed near the area of the February 2018 breakdown several times over two years.
- U.S. has the largest weight and is also the best market. Conviction ideas include LULU, EW, NKE, COUP, MSFT, TER.
- EFA Developed ETF has failed at downward trending channel line three previous times this year.
- Stoxx 600 European Index has failed at/near two-and-a-half-year high resistance four times this year.
- France, Switzerland, Australia, and Canada are nearest highs. Strong setups include Korian ( KORI.FR ), LVMH ( LVMH.FR ), Safram ( SGM.FR ), Xero ( XRO.AU ), Constellation Software ( CSU.CA ), and Sika ( SIKA.CH ).
- EEM Emerging ETF has failed at downward trending channel line three previous times this year.
- China, Brazil, India, Colombia, Taiwan are nearest highs. Strong ideas include Notre Dame Intermedica (GNI.BR), Guangzhou Shiyuan Elec Tech ( GYE.CN ), Wuxi Apptec ( WIX.CN ), TSM ( TSM.TW ), Win Semi ( WSN.TW ), Hindustan Unilever ( HDL.IN ), Kotak Mahindra ( KOK.IN ), and Bajaj Finance ( BJF.IN ).
Global Sector Commentary
Key points:
- Market performance in this presidential cycle has played out mostly in line with historical averages through much of the first three years (2017-2019). The first year was better than normal, while the typically weaker second year was especially weak in 2018. The third year is on track to outpace its historical average.
- Within the third year, 2019, returns have been fairly close to their quarterly historical averages.
- Q1 was better than past average third years, while Q2 was worse. Combined Q1 and Q2 totals from this year were very close to past first-half averages.
- While Q3 was a bit better than normal for the S&P 500 and Dow Industrials, it was worse for the Nasdaq.
- Q4 is typically a positive quarter, both overall and in third years. However, gains have come towards the end of the quarter, on average.
Global Sector Commentary
Key points:
- Median 4% sales and 3% EPS growth expected for S&P 500. 3% sales and -2% EPS for S&P 600.
- Fourth quarter of median earnings deceleration for the S&P 500 expected. Sales expected flat from last two quarters, matching the lowest in seven quarters.
- Notably, the trend of lower estimates has been happening for several quarters and is not abating. Since May, S&P 500 Q3/Q4 2019 and Q1/Q2 2020 estimates have all declined substantially, even after a 3% earnings beat in Q2. But full-year 2020 numbers (black line) have not come down much, likely meaning a further revision lower is necessary.
- The Cyclical, Staple, Material, and Technology sectors are all expected to show y/y declines.
- On a more positive note, Retail, Health Care, and Transports should still grow by mid-to-high single digits.
Global Sector Commentary
Key points:
In our view, the global themes currently providing the best opportunities include:
- U.S. and European aerospace and defense, med-tech, and payments
- U.S. and Brazil consumer discretionary
- U.S. and European building products
- China food/beverage and health services
- India consumer and financial
- Global alt energy producers and U.S./China solar products
Meanwhile, groups that are persistently weaker about which investors should remain cautious:
- U.S. and European oil & gas
- U.S. biotechs
- Global autos and parts
- Developed market banks (despite some recent gains)
- European retail
Global Sector Commentary
Key points:
- This week saw an aggressive move in U.S. markets toward value and cyclical stocks. It is unclear whether this will be a lasting trend or simply a countertrend rally by underperforming shares. Regardless, the last time a similar move arose was in 2016, when economic growth began to reaccelerate going into the presidential election. During this time, strong dividend growers outperformed despite the move up in value and small-cap stocks. We feel confident that this can occur again if the economy accelerates in the fourth quarter of this year. The notable reversion into small-cap and value is likely to continue for a period as well, but we favor the better-positioned dividend growth companies over those two segments.
- A few favorable dividend growth names include T, HD, LRCX, CE, RTN, NEE.
- Some favorable small-cap names from improving industry groups include MGRC, GSHD, ALG, ATKR, PLAB, MRTN, KNSL.
Sep 12, 2019 – The Growing Sustainability of Renewable Energy Investing Webinar
Research Analyst Kenley Scott leads a discussion of the growing sustainability of renewable energy stocks as investments. As renewable energy projects are declining in cost to build, while providing steady, long-term revenue streams for producers, a variety of stocks from the O’Neil Energy-Alternative/Other Industry group now have strong investment cases. Tune in to find out which stocks you should be watching in this space!
