Richard Bernstein, founder of asset management firm Richard Bernstein & Associates and former chief quantitative strategist at Merrill Lynch, is not afraid of sticking his neck out. In recent years, his predictions have looked contrarian to the point of lunacy before turning out to be incredibly lucrative.
Mr. Bernstein's ten investment ideas for 2014 can be found here. For Canadian investors, two of the ten stand out. One, gold will fall below $1,000 (U.S.) per ounce, and two, low quality stocks will outperform high quality, stable earnings stocks.
The bearish view on gold is a function of global inflation pressures – because they don't exist. He writes, "the global credit bubble is deflating, and developed economies' inflation rates continue to fall without credit's fuel…we think U.S.-dollar based investors should emphasize financial assets rather than real assets like gold."
"High quality" is one of the most over-used (by people selling things, mainly) terms in finance. The academic, expert definition of the word, is best expressed by the S&P quality ranking system. It confines usage to large cap, non-cyclical (ie. non-commodity) stocks where earnings growth is extremely consistent and non-volatile.
A portfolio of high-quality stocks certainly sounds like a good idea. But Mr. Bernstein believes they will underperform next year, "Many investors believe that quality stocks outperform over the long term. Unfortunately, there is little objective data to support that contention…. 2008's lingering fears have led investors toward more conservative, higher quality stocks. We think that trend might reverse during 2014."
I think Richard Bernstein is the best U.S. market strategist working, and his overriding point, that investors may be over-paying for stable profit growth in sectors like telecom services and consumer staples, is well taken. Even so, I'm not about to suggest Canadian investors ditch their domestic bank stocks (which do conform to the S&P definition of high quality) in favour of small cap U.S. manufacturers.
The most practical and responsible investment application of Mr. Bernstein's ideas is to take some profits in gold (if there are any left) and stable growth stocks and build a small position in a diversified, small cap U.S. equity fund or ETF.
Scott Barlow