There are certain words we all use that have immediate connotations when heard. When I hear words like "interesting," "cozy," or "transitioning," sentences immediately pop into my head. "Wow....wasn't that an interesting candidate we just interviewed" which is code for "she was crazy." Or..."That's a cozy restaurant" which means you can hear the next table's marital woes blow for blow. Finally..."I'm transitioning professionally" usually means he's probably living at home with his parents. What we're witnessing in markets now and foresee in the future are markets "transitioning" which is code for "it's going to be harder to make money in U.S. markets." What do I mean?
A confluence of events are occurring which are impacting U.S., multi-national companies negatively. First, commodity weakness is tough on many emerging markets who produce commodities. The weakening demand means less production which means less importing of American goods, which hurts the Coca-Cola's, Yum Brands & Caterpillars whose earnings rely on foreign purchases.
Rising rates in the U.S. also means that U.S. Treasuries will be more inviting for all other currencies as rates increase in these investments. More foreign money will chase higher yielding, safer treasuries. This fact helps solidify our currency, but adds to the aforementioned trade problems.
So we believe the "transition" may mean that we have to look to foreign markets more heavily in Europe in 2016. The Quantitative Easing (QE) program in Europe has pushed the spread between their government and corporate bonds yields compared to stock dividend yields to a 50 year high. This discrepancy should push more investors to purchase investments with higher dividend yield versus traditional European bonds with lower interest yield. Citigroup analysts believe that European shares could grow as much as 70% by the end of 2016. (1) While we think this prediction might have been a bit exuberant, we can't argue with the fact that there are better valuation deals in Europe now. With the S&P 500 currently averaging a 19 Price-to-Earnings Ratio (PE ratio) and European indexes currently in the low teens, we believe there is more value abroad.
The discussions we are having with portfolio managers and their emissaries indicate a preference now and for the upcoming year for Europe-centric investments. Expectations from these same experts for large cap U.S. investments are in the 4-6% range in 2016-17.
What we believe all this means is we are not xenophobic when it comes to investments! In fact unlike Donald Trump, we'll be downright hospitable to foreigners and their companies if it can help our clients make money. Look to see gradual shifts in our portfolios if trends continue. See..."transition" can have good connotations too.