What Are BCA’s Top Ten High-Conviction Equity Sector Calls For 2017?

Our biggest out of consensus call is to overweight the much maligned consumer staples sector.

One of the most glaring divergences between our macro indicators and relative share price performance exists in the consumer staples sector.

Since the U.S. election, this sector has been used as a source of capital to fund more speculative investments in areas levered to global economic growth, such as industrials. An exploitable undershoot has developed in a sector with one of the best 12 and 24-month track records during Fed tightening cycles. The sector is undervalued, and is resting at an oversold extreme, based on our Technical Indicator.

Our Cyclical Macro Indicator for the sector is grinding higher, Supported by consumers’ persistent preference for saving vs. spending, a plus for retail sales at non-discretionary stores. Tack on a budding recovery in consumer staples exports (bottom panel), and the nascent acceleration in sector sales growth should strengthen further, supporting earnings outperformance.

For our complete list of high-conviction calls, please refer to Monday’s Weekly Report titled “2017 High-Conviction Calls“, available at uses.bcaresearch.com.

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What Are The Equity And Sector Implications Of De-Globalization?

The most profound and simultaneously provocative investment implication from the end of globalization is that real earnings have plateaued and will likely come under pressure. Reconstructed S&P 500 EPS data date back to the mid-1920s. Historically, corporate profits and globalization have been positively correlated. As globalization intensifies, global trade links deepen and “borders fall,” boosting companies’ international revenue exposure. The opposite occurs under de-globalization. Typically, higher top-line growth from foreign markets has also been associated with increasing overall sales and profitability. However, the tide has already started receding. If President-elect Trump’s policies sabotage global trade, then internationally sourced turnover has more room to fall, likely weighing on overall sales and EPS.

On the inflation front, not only is de-globalization inherently inflationary, but most of Trump’s policies also lead to inflation. On a shorter-term basis energy prices will also add fuel to the looming inflationary backdrop. If crude oil prices move sideways from current levels, oil inflation will be up 100% in February 2017, and given the historical correlation with headline and core CPI, some transitory inflation effects will flow through the data.

The inflation-related equity-market investment implications are threefold.

First, the broad equity market’s P/E multiple moves inversely with inflation. The chart shows that since 1926 a rising inflation impulse caps multiple-expansion phases, and a waning impulse leads to an equity market rerating. The link is via the ebbs and flows of the fed funds rate or the discount rate. As the economy gains steam and inflation propagates, the Fed acts belatedly and tightens monetary policy. A higher/rising fed funds rate leads to a multiple contraction phase. Since 1979 (when forward EPS data commence), every time the Fed has embarked on a tightening cycle the forward P/E multiple has been squeezed.

Second, …

For additional details, please access the Special Report titled “How To Profit From De-Globalization” at gss.bcaresearch.com.

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Dow 20,000? – Another Great Call By BCA Research

It was the spring of 1999 when the late Professor Charles Kindleberger spoke at our Miami conference. At 89 years of age, he eloquently explained why bull markets are usually born in pessimism, grow in skepticism and die in euphoria. At the time, he seemed a little frail, a trifle uncertain and very concerned that he did not understand the investment thesis for the dot-com boom and the New Economy. However, he was firm and even downright jaunty that “we are living in a euphoric time”. He was right: the NASDAQ peaked at 5,048 in early 2000.

For additional details, please access the report titled “Dow 20,000?

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What Are The Global Equity Sector Winners And Losers When Inflation Climbs?

President-elect Trump and the specter of his spendthrift policy proposals have generated significant client interest/inquiries on equities and inflation – not asset prices, but of the more traditional kind: consumer price inflation.

The chart shows that a little bit of inflation would be positive for the broad equity market, further fueling the high-risk, liquidity-driven blow off phase. However, when inflation reaches 3.7%-4%, the broad equity market hits the brakes.

Sizeable tax cuts, increased infrastructure and defense spending (i.e. loose fiscal policy), protectionism and a tougher stance on immigration are inherently inflationary policies (and bond price negative) ceteris paribus. However, our working assumption is that in the next 9-12 months, CPI headline inflation will only renormalize, rather than surge.

The purpose of this Special Report is to serve as a global equity sector positioning roadmap given the budding inflationary backdrop.

Historically, inflation is synonymous with…

For additional details, please access the report titled “Global Equity Sector Winners And Losers When Inflation Climbs” at gss.bcaresearch.com.

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