Financial Professionals

Market Insights

Revisiting My Nine Investment Themes

07/21/2014

Last December I authored a 70-page outlook presentation, “The Search for Growth,” which included nine investment themes going into 2014. Several of those themes have remained constant, as has my expectation for the “emergence of acquisitions,” which has been a tremendous favorable tailwind for global capital markets.

Here is a revisit of those nine investment themes, including my views in December followed by my current expectations for each.

July 20, 2014 Update

Yes, both in terms of domestic economic data and earnings growth from corporations in the goods/services sectors, confirmation has been traced out that investors should favor a “goods over services” approach. In fact, the consumer discretionary sector is the worst-performing sector of the major nine with a year-to-date performance of only +1%.

July 20, 2014 Update

Yes, investors should continue to focus on the ownership of financial institution debt over equity. Entering 2014 the yield curve relationship (U.S. 2-year/10-year Treasury) that financial institutions rely upon was nearly 65 basis points steeper than today. Keep focusing on debt opportunities until the yield curve steepens once again.

July 20, 2014 Update

Year to date, the MSCI US REIT Index has returned over 17%. Our expectation for the third investment theme has worked out well. However, valuations have risen, suggesting investors not to raise current weightings. But do maintain current weightings as the U.S. REIT market could begin to experience M&A tailwinds similar to what the overall market has experienced year to date.

July 20, 2014 Update

Year to date, the German DAX is +1.76% while the French CAC 40 is +0.92%. While this investment theme has not proven incorrect, it really hasn’t materialized with any degree of positive momentum. Therefore, let’s remove it as an investment theme.

Additionally, Spain’s IBEX is +6% and Italy’s MIB is +9% year to date, which underscores how troubled the French economy, is. Investors should not view the removal of this investment theme as an indication that opportunities exist for France.

July 20, 2014 Update

Yes, the addition of Taiwan (year to date +9%) and India (year to date +21%) has proven correct. There is no suggested change at this time to weightings toward those two emerging markets. South Korea and Mexico who both had previously been on the “U.S. exposed” emerging market 2013 list are both positive year to date but have underperformed the S&P 500 Index (SPX). For the second half of 2014 stayed focused on “bottom up” opportunities related to India and Taiwan and less focused on Mexico and South Korea.

July 20, 2014 Update

The Tokyo Stock Exchange REIT Index is +6.12% year to date, while the Nikkei is down 6.6% year to date. Investors should continue to view the Japanese REIT market favorably. The monetary policy actions from the Bank of Japan will continue to support the Japanese property market. Vacancy rates are continuing to trend lower lifting rent rates. In particular the Tokyo property market is witnessing positive price trends.

July 20, 2014 Update

Yes, stay convicted and overweight technology. Use of cash in the technology sector in 2014 has been shareholder friendly.  Growth is evident on both the top and bottom line. The surprising condition of falling U.S. Treasury yields has made the technology sector even more appealing considering its growth-oriented characteristics.

July 20, 2014 Update

This hasn’t worked. Year to date, MBS has outperformed CMBS by roughly 125 basis points. Investors should still consider ownership of CMBS as the U.S. commercial real estate market is recovering further. However I do not maintain enough confidence that the recovery in the CMBS market is strong enough that investors should make a clear distinction between CMBS and MBS. Sometimes it is best to admit “I just don’t know.” This is such a case.

July 20, 2014 Update

Yes, the Street was too bearish on commodities. Stay committed to the investment theme; the evidence suggests further upside potential for commodity related equity names.

Past performance is not a guarantee of future results.

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