Where are the opportunities in the current economic environment?


As the first quarter data fades in the rearview mirror, we continue to expect any better economic numbers to meet the conditions set by the Fed to hike rates: continued improvements in the labor market as well as reasonable confidence that inflation will return to target over the “medium term”.

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Market Realistic –

Despite a slowdown in the first quarter, there are still a few pockets of value in the US markets (VOO) (VTI). Investors can turn to (XLF) and technological sectors (IYW) (XLK) to find opportunities in the current economic environment.

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Mature tech stocks like Apple, Intel, Microsoft, and Google are not only rich in cash, but also have strong earnings positions. The absence of excessive debt and their cash-rich balance sheets make them well placed for any rate hikes in the future. The chart above shows the liquidity of major mature tech stocks.

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Financials look attractive based on their relative valuation. Most sectors of the S&P 500 are valued higher than their historical averages, as you can see in the chart above. However, financials seem relatively attractive compared to the rest of the market. The futures price / earnings multiples hover around 13x.

Large-cap financial firms involved in capital market transactions are also expected to benefit from the expansionary monetary policy followed by most of the world markets. (ACWI). This facilitates merger and acquisition (or M&A) activity.

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The current economic environment makes it all the more important to find opportunities abroad and take advantage of diversification. Europe (EZU) (VGK) and Japan (EWJ) both look attractive as central bank action is boosting stock markets in both countries. The chart above shows how European and Japanese stocks have outperformed the S&P 500 in 2015 so far.

Stay cautious of two important data indicators going forward: inventories and consumer spending. An increase in both indicators would bode well for GDP growth in the next quarter. However, a decline could signal a weakness in the economy.

Read our series on Will the US economy rebound as expected in Q2? for possible headwinds for growth in the next quarter.


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