Gambling on a Hard Landing
Stephen Martin has been speaking about a hard landing for some time. In this article, he highlights that despite hitting an all time high, the spectre of a hard landing still haunts the US.
In conclusion, I think it is too early to declare a soft-landing victory. The stock market has already opened the bottles of champagne and is celebrating. The bond market is taking a more salubrious approach. The stock market anticipates a mid-90’s FED induced soft-landing but this is not the mid-90’s and soft landings are rarely achieved. Furthermore, there are many more imbalances and risks now than there were in the mid-90’s. The U.S. markets are still important leading indicators and will have an influence on global capital market activity. In the short run, the DJIA has collectively decided that a soft-landing is a likely scenario and this should have positive implications for most markets. I still think one should maintain a holding in defensive stocks like tobacco, health care, telecoms etc. They should still do well if the FED begins to lower rates and there is still some uncertainty over economic growth. The consumer cyclicals look to be good value if the soft-landing scenario holds but could reverse quickly if evidence of a hard landing appear. I would play the consumer cyclicals but I would be very alert to the signs of a hard landing and be prepared to move quickly to close positions. The commodity cyclicals will continue to be very volatile in my opinion and as I have predicted earlier this year. I still like NYMEX gas and after the big sell-off it has recovered 50%. Oil is still trying to find a bottom and should achieve this around the $50 /bl level. Demand erosion, primarily brought on by a slowdown in economic growth will trump supply concerns over geopolitical risks in the short run. However, the supply/demand factors that helped propel energy prices over the past few years will continue and oil will test $100 /bl. during the next cycle.
Based on this top-down approach and taking into consideration our investment universe I would recommend the following strategy:
- Stay over-weight the large cap Pharmaceuticals like Novartis (NVS) and Roche (ROCM). They will benefit from their defensive nature, the growing risks of a pandemic, strong pipelines and demographics.
- Stay over-weight defence stocks like Ultra-Electronics and Cobham, which will continue to benefit from the global arms race and will provide a hedge in the event of a rise in geopolitical tensions.
- Continue to trade around core positions in the solar stocks like SolarWorld (SRWRF.PK) and Conergy (CEYHF.PK). These are leaders in a true growth sector. While energy prices are likely to remain volatile in the short run we are still in a secular bull market, which could last 20 years. Furthermore, global warming issues are unlikely to abate and governments around the world will continue to support alternative energy programs.
- Consumer discretionary stocks are and will continue to benefit in the short run on hopes of a soft-landing. However, it is worth considering the liquid names with good fundamentals. In this space I prefer Puma (PMMAY.PK) and Geox (GXSBF.PK). Puma will be more vulnerable to cyclical factors while Geox is well positioned for growth.
- It may be time to short or sell companies that are prime beneficiaries of globalization. Perhaps the easiest way to do this is through the banking sector. HSBC could be vulnerable to de-globalization trends as it is one of the biggest beneficiaries of globalization. This strategy is of course risky. For this strategy to work it would require a severe global slowdown amidst an extension of the counter-trend of globalization. This strategy is therefore a contrarian strategy
It should be noted that my stock holdings mirrors that of Stephan’s recommendation. Note that it was intentional. just see value and good reasoning to invest in healthcare.
Related posts:
- Adampak: What does SSD replacing Magnetic Hard Disks mean to them
- David Rosenborg:Sovereign Risk is gonna hit markets hard
- A Bullish Bet on Joe Consumer
If you enjoyed this post, please consider to leave a comment or subscribe to the feed and get future articles delivered to your feed reader.
Comments
No comments yet.
Leave a comment