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Market Rotation Provides Investment Opportunities in Three Major Growth Areas

June 2014

The global economic picture began to turn in the spring of 2013 as low growth, weak inflation and low rates gave way to improving growth, reflation and rising interest rates. “Defensive” sectors (such as consumer staples, telecommunications, healthcare and utilities) that were very strong performers after the recession began to lose steam.

As the growth outlook continued to improve through the second half of 2013, higher growth investments began to take the lead. Growth cyclical sectors such as technology, industrials and consumer discretionary stocks performed well and rallied into year end.

We Expect Growth Stocks to Outperform, Despite a Pullback in Early 2014

Growth stocks have lost some of their momentum so far this year. However, we see this slowdown as a near-term pause and not a long-term reversal back toward defensive stocks. This pause is not surprising given the softer economic data in the beginning of the year, which we attribute a great deal to harsh winter weather, and a smaller degree to the political situation in Ukraine and Russia. This retrenchment in risk-taking coincided with a decline in interest rates, which gave dividend-yielding stocks a lift.

As the global economy, led by the US, gains traction, our expectation is that growth cyclicals will resume the trend of outperformance. We also believe that defensive sectors, like consumer staples, have become very expensive relative to their deteriorating earnings, making these stocks relatively less attractive.

Three Major Growth Areas

We believe that this pause in growth stock momentum has given investors a second chance to position their portfolios for what we believe is an elongated business cycle that has just began to normalize, led by the US, since the global financial crisis.

We view the following three areas as particularly attractive as we look ahead:

  • Mobility and connectivity
    The Internet is ubiquitous and mobile devices provide connectivity to the home, office, and social circles. Companies that recognize and capitalize on these trends should stay relevant and grow, both on the business-to-consumer and the business-to-business sides. We expect the areas of retailing, advertising, automotives, healthcare, financials and industrials to be benefactors of growth in mobile computing.

  • Energy infrastructure and manufacturing efficiency
    Low cost natural gas should continue to be a positive driver for the US, and to the rise of middle-America. In addition, we expect automation and robotics in manufacturing to continue to increase productivity, both in reducing costs and increasing production quality and quantity.

  • Biotech and healthcare efficiency
    A more accommodative FDA and advances in research have led to a rise in drug development, particularly in biotech. At the same time, we believe the need to improve medical systems and cost-efficient treatments will continue to drive innovation and adoption of healthcare technology.

 

This communication is intended solely to provide general information. The information and opinions stated are as of June 6, 2014, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

CFA and Chartered Financial Analyst are trademarks owned by CFA institute.

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The Author

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Carin Pai, CFA
Executive Vice President and
Head of Equity Strategy

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Market Rotation Provides Investment Opportunities in Three Major Growth Areas

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