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US Market Perspective – A Focus on Sectors
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Charles Schwab
At times of heightened uncertainty and market volatility investors focus increasingly on the overall economic environment to inform sector investing decisions and less on individual sector fundamentals. We’ve seen indications of at least some return to the ‘risk-on, risk-off’ trading we’ve seen often during the last couple of years, however, that doesn’t mean that fundamentals should be ignored.
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the housing market still very much struggling in the US, utilities continue to be relatively weak with limited growth opportunities over the coming months. At the other end of the scale, we currently hold an outperform rating
on both the industrials and the information technology sector. As we anticipate a modest acceleration in economic activity in the coming months, we expect industrials to benefit as businesses look to invest in their equipment and put large cash balances to work. After a period of tight purse strings in the corporate environment, companies are at the point where they appear to need to start replacing and updating equipment, which ultimately benefits the industrials sector, hence our outperform rating. We also hold an outperform rating on the information technology sector,
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Here at Charles Schwab we currently rate both the consumer staples and utilities sector at underperform. As would be expected, the consumer staples sector performed relatively better than most others during the period of decline in the market through the course of 2011. Its traditionally defensive characters are attractive to investors during heightened times of uncertainty. However, for now, we don’t believe this performance is sustainable, as we believe the economy will perk up modestly in the coming months, and recession fears will continue to fade. The staples group is considered defensive because it tends to sell items that will be purchased regardless of the economic environment, such as toilet paper and laundry detergent. While this is typically a positive during tough economic times, it can also be a negative during times of improving economic conditions as consumers don’t typically expand their spending on such items as the economy improves - demand stays relatively constant. Although the fundamentals of the group remain relatively solid, we have seen the staples sector lag during times of economic expansion and believe investors will be looking toward sectors that stand to benefit more from that potential improvement and shift out of the more stable sectors such as staples. As a result we believe the underperform rating is appropriate at this time. Also currently at an underperform rating, in our view, is the utilities
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sector. As with consumer staples, utilities are also associated with defensive positioning, investors typically flock to the group when economic uncertainty increases and away when growth expectations improve. Although we have seen outperformance as a result of rising concerns of a return to recession, we believe those fears are overblown and as noted above, we believe that economic activity will pick up in the coming months, although risks are certainly elevated. Furthermore, with
www.finance-monthly.com OCTOBER 2011
despite some occasional blips due to growth scares, management shake-ups, inventory concerns, and supply chain issues, but we believe these are largely temporary issues that provide potential buying opportunities. With large cash balances, increasing dividend payments, solid management and tight inventory controls, the information technology sector is becoming increasingly stable and even outperformed during the recent downtown. As with industrials, as companies begin to loosen their purse strings, technology is another key area that we would expect to see new investment concentrated. Investments in technology are typically attractive because they tend to increase companies’ efficiency and productivity at all levels. For these reasons, we believe those who remain invested in tech will be rewarded with outperformance in the coming months. As well as our underperform and outperform ratings as noted above,
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we also continue to hold a market perform rating on the consumer discretionary, energy, financials, healthcare, materials and telecommunications sector.
recommendations can and do change quickly at times as we continually monitor economic progress and specific factors influencing individual sectors. One of the most important considerations for any investor is to maintain a diversified portfolio that is appropriate for your personal time horizon and risk tolerances. FM
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By Kully Samra, UK Branch Director, Charles Schwab
It is important to note that our