Is sector rotation upon us?
With tech doing much of the load bearing for this bull run, is it time to leave this highly volatile and very expensive sector in anticipation of darker times?
If you’ve invested in high growth companies, the Master Cards, Amazons, Alibabas, and Twillos of the world. Over the course of this bull run, its safe to say you’ve probably made money. We believe now is the time to get defensive. These type of names are starting to show weakness across the board, namely Monday, October 8th, where it seemed like any cloud related company was dumping -5% across the board. This not be because the macro situation is looking grim, because right now, its not. The new USMCA trade deal, coming off a great earnings season, job numbers running hot in the us, and economic growth just chugging along. In our opinion, its hard to see the economy getting much better than this. rates rising, unemployment beneath 3%, bond yields on the rise, and that trade war with china which seems like no end in sight. Couple that with a midterm elections that could shake things up, we think it’s time to go on the defence.
Sure you may miss some money off the top in a continued melt up, but after having great gains, its time to look to value and safety for opportunities. Names in real estate, healthcare, and financials is where we would be looking. Real estate for its defensive nature, as well as ability to raise rates in relation to inflation longer term, healthcare for its defensive nature as well as its longer term growth opportunities, being in a secular bull run. And financials for their value, still trading above book value and most names such as $GS and $BAC trading below market multiples, with good growth expected. as well, if this market will make a new high, the financials will have to power it in our view, meaning there’s upside and downside protection.
Our favourite names would be for real estate, a VNQ, an etf giving you exposure and protection in this late cycle movements. For healthcare, we like names like Stryker, CVS, Pfizer. Primarily most names in medical devices are our favourite, so an Abbott labs type could give you the Pharma and med device compliment. For financials, we have been looking long and hard at Goldman Sachs, Bank of America and a credit rating name such as moody’s or S&P global, for its large moat and more predictable business. S&P has the added diversification as having both the credit rating and indexing business, and isn’t to expensive at around 21x 2018 earnings with a predictable 10%+ growth in a protected and large moat industry of credit ratings. Bonds always needed ratings, and their will always be a need for index funds, especially for passive investors, and S&P is well positioned in both.