The US is stronger than many people think, Boston Company’s Daglio says
There are three areas of the market that are particularly attractive right now – financials, manufacturing and technology, according to David Daglio, lead portfolio manager of The Boston Company US Opportunities Fund.
One thing that appears certain in this macroeconomic landscape is a shift to higher rates, which in turn is likely to spur a significant shift in the equity market, as policy can be inherently inefficient and crude. When the central bank attempted to bolster the beleaguered US housing market in the wake of Lehman Brothers’ collapse, capital flowed to where the river ran fastest – in other words, to those areas most capable of swift recovery. Fed tapering is likely to reverse this and the winners should be those companies positioned to thrive in a higher-rate setting, such as small and regional US banks. With substantial deposit bases – a competitive advantage that does not exist in a zero-bound rate environment – small and medium-sized banks are set to outperform their larger competitors. Indeed, small banks could grow their earnings by around 35% this year. What’s more, valuations have made this area compelling – you seldom hurt yourself falling out of the basement window.
US competitiveness in manufacturing may not yet be rising but its decline has halted evidence of a slowdown in the decline of manufacturing is largely qualitative at this stage but some quantitative measures are starting to be seen as well. In fact, US electricity costs are falling relative to the rest of the globe due to cheaper natural gas while productivity-adjusted wage costs have improved by 50-70% over the past decade. There is evidence of a bounce across sectors: for example, we believe one of the early beneficiaries will be office furniture spend, which has been at depressed levels over the past decade. The last ‘refreshment cycle’ was in 2000, and an upgrade cycle is long overdue. Although we cannot predict the exact date of a corporate spending bounce, we believe it is imminent.
Now is an exciting time to be a tech investor: it is a diverse area containing varied levels of momentum within different strands. Overall we like the sector as with anything uncertain there is the opportunity for alpha. While the sector is a tale of two cities – old versus new tech – there is appeal to both sides. For instance, as cloud computing takes off the PC chain has become less competitive, creating more attractive profit margins for such companies. Meanwhile, ‘net neutrality’ is a big feature in tech markets today. Some companies profit from delivering content to subscribers without having to pay for that delivery. Cable and infrastructure companies are laying the ‘pathways’ for internet content services but not reaping the profits. Evolution of the tech sector will continue apace – it looks set to remain a hotbed for investment opportunities.