Long Term Investors Maintain Allocation To Quality Stocks
Indices retraced slightly last week as we enter a mini-cycle similar to 2015, the long term picture remains bullish. As the chart above shows defensive sectors have outperformed cyclical sectors while at the same time exhibiting lower volatility on a one year basis. This ‘anomaly’ is on account of short term investors turning bearish while long term investors maintain their allocations. The exceptions are Technology, a secular growth story and Discretionary, a sector where short and long term fundamentals remain relatively strong.
IHS Markit’s estimates of US manufacturing PMI has been soft and last week’s data of 50.6 is at a decade low due to weaker demand. This tallies with a negative performance of the Industrial sector ETF in spite of a 17% level of annualized volatility.
Similarly, the reduction in input costs despite tariff uncertainties, led to a decrease in output charges. Again this tallies with the fall in value of the Energy and Materials sector ETFs. These are transitory factors, which provide an opportunity to allocate on dips, but is also popular trade judging by the soft declines of blue chip counters like Microsoft, Nike, Visa or LVMH currently as investors resort to buying quality stocks in spite of higher prices.
Longer term data remains bullish as consumer sentiment is at a 15 year high, wage growth is at cyclical highs, the unemployment rate is at a 50 year low and estimate for GDP growth is some 2.6% for this quarter and 2.4% for the calendar year.
European data remains soft as the bloc faces headwinds from a slow-down in the Chinese economy mainly as a result of trade sanctions. In China industrial production, fixed asset investments, retail sales, exports and loan growth have declined sequentially and may affect the pace of recovery of the Eurozone
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27 May 2019
Short Term Headwinds Emerge But The Long Term Outlook Is Intact
Dip Buyers Patiently Await Another Opportunity
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