Equity Strategies Group-Level Analysis Of The Equity Markets

Advertising, Homefurnishing, Research & Consulting Services

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IT’s overall sector rank has been falling recently. Growth has slowed, which has prompted downward earnings revisions, while valuation ratios have remained steady or gotten pricier.

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While this Consumer Discretionary group has not experienced six-plus-years of market outperformance, we think it may be poised for a late-game bounce. An overall lack of housing options may be just what this industry needs to give it a long-awaited boost.

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Health Care, Consumer Discretionary, and Financials are the top three rated broad sectors.

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The last time this group held an Attractive rating for an extended period of time was 2000. Based on the group’s extended underperformance, induced by repercussions of the global financial crisis, we think it may finally be poised for a turnaround. 

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While we view the industry group selection as the most important decision, looking at the sector level rankings also helps us identify broad trends. Here we highlight the top two rated sectors, currently, which also represent a combined >40% weight in our Select Industries Portfolio.

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Until now, this group has been out of favor per our quantitative disciplines for the entirety of the bull market, making its newfound attractiveness particularly interesting. Even an 80% return in 2013 hasn’t brought relative performance back to levels achieved during the previous bull market.

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Cable & Satellite, Education Services, Human Resources & Employment Services

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A new position in Drug Retail was added to the Select Industries Portfolio in April. The latest update to the Group Selection (GS) Score showed improvement in several factor categories which pushed the overall score back to Attractive.

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Reinsurance has rated Attractive for a little over one year, but the latest round of GS Scores sent this group’s score skyrocketing, and it now ranks fourth highest among all 115 industry groups. Select Industries Portfolio overall insurance industry group exposure now 8.1%.

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While Large/Mid Cap Biotechnology companies are boasting rising profitability, better cash flows, and stronger drug pipelines, the Small/Micro Cap Biotech firms, in general, have little tangible to show and valuations may be above the comfort zone.

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Health Care, Info Tech, and Consumer Discretionary are the top three rated broad sectors.

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Most of the factor trends that were in place at the end of 2014 have continued in 2015 thus far.

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Health Care Distributors, Movies and Entertainment, and Cable & Satellite.

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Despite this sector’s extended outperformance, we think this trend may persist in the near term as Discretionary industry groups look increasingly attractive within our group work. Keeping an eye on the Fed Funds rate is key, however.

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Our long term view towards China is positive (especially relative to other large EM countries), but short term, we see signs of the A-shares segment overheating and caution against near term corrections.

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Using “Analyst Score” to measure sentiment and our Group Selection (GS) Scores, we present what appear to be the most quantitatively Attractive, yet disliked equity groups.

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Performance of this thematic group has been strong but the domestic Big Four networks are facing increasing competition overseas. However, there is still a much better growth profile compared to many other industries.

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Lower energy prices will benefit the paper industry as it is among the most energy intensive of Materials groups. Yet, global implications may produce a headwind, offsetting the benefit of lower oil costs.

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Advertising, Health Care Services, Auto Parts & Equipment

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