Stocks – especially American stocks – might be on the expensive side, but equities are still the best game in town.
That's the prognosis of Gluskin Sheff's David Rosenberg, the one-time bear who has been bullish on the United States for about two and a half years.
The chief economist and strategist ended today's note to clients by outlining his thoughts on where investors should look to put money to work in 2015. While he doesn't single out individual equities, Mr. Rosenberg does offer an overview of sectors, regions, and asset classes that he believes will fare well in the year ahead.
American technology and consumer discretionary stocks
Both of these segments, according to Mr. Rosenberg, will be the prime beneficiaries of the renaissance of the U.S. consumer.
He calls consumer stocks "a virtual lock" amid a backdrop of firming wages, robust job growth, and the drop-off in energy prices.
The strategist reminds us of something that came into clear focus after Canada's biggest banks reported a disappointing set of fourth-quarter results: their growth prospects are dimming.
Nonetheless, he sees "compelling valuation support" for the group, highlighting its 4 per cent dividend yield.
The European Central Bank has begun to purchase covered bonds and asset-backed securities, and may buy sovereign bonds if inflation or economic growth fails to show signs of improving. These moves depress yields on fixed income and nudge investors towards riskier assets such as European equities, which boast a healthy dividend yield of 3.7 per cent. Mr. Rosenberg believes additional stimulus from Mario Draghi and his counterparts is inevitable.
While the strategist does not dismiss the recent uptick in headline risk stemming from political turmoil in Greece, he sees potential in euro area financials, which are attractively valued, and large-cap exporters, which will be buoyed by a weaker currency and stronger U.S. growth.
Midway through the year, the TSX/S&P Capped Energy Index was up more than 20 per cent year to date – now, it's poised to finish the year down nearly 20 per cent after markets rapidly adjusted the price of crude oil to reflect the surge in supply and paltry growth in demand.
But if history is any guide, 2015 will bring about a rebound in energy stocks. "The sort of divergence we saw in 2014 between energy and other sectors of the stock market is extremely rare, but in the ensuing year the tradition has been for the beaten-down sector to outperform in the next 12 months," said Mr. Rosenberg.
Time to treasure corporates
Mr. Rosenberg seems somewhat incredulous that long bonds performed so well in 2014. "I mean, the long bond generating a +29 per cent return in a year that saw the economy close with its best momentum in 11 years, the best job creation in 15 years and consumer confidence at its highest level in seven years?" he said. "Really?"
From his position, higher-quality corporate credit and emerging market high-yield bonds have a better risk-reward profile than long-dated U.S. Treasuries.
Japanese stocks up, yen down
Just as with European stocks, Japanese equities look quite attractive – or, as Mr. Rosenberg puts it, "interesting" – at a time when the two-year government bond has a negative yield thanks to exceptionally aggressive central bank easing.
The spread between yields on Japanese and American fixed income will see flows to United States rise, according to the economist, which will put more pressure on the yen. "It is not all difficult now to see the U.S. dollar head towards ¥150," he said.
The depreciation in the yen has served as a tailwind for corporate earnings and stock prices in Japan.
Choose your emerging markets wisely
Investors who continue to treat emerging markets as a cohesive whole do so at their peril, says Mr. Rosenberg, who says this group requires "selectivity." Major macroeconomic developments, such as the decline in the price of oil, do not have a uniform effect on emerging markets. Some are large oil importers; others rely on petroleum exports to fund their budgets.
Mr. Rosenberg thinks a phrase that became popular in the United States circa 2013 will be applicable to equities on the other side of the world in 2015. "China's weakening economy did not stop the stock market there from enjoying a banner year (up another 6 per cent in just the past two sessions) and with inflation coming down, bad news may become good news as it was last week via the stealth easing move which gave the banks a wider regulatory deposit base for which to lend against," he said.
For more views on what 2015 may bring for investors, see our Market Outlook page.