Bank of America’s private wealth management (the old US Trust) Chief Investment Officer Christoper Hyzy is out with some rather bullish commentary on the heels of Friday’s employment report from the BLS.
Chris believes we are somewhere in the middle of the economic cycle and there’s plenty of room left for risk assets to perform.
Some bullet points from his note: below – JB
Our story remains the same:
• The private sector is in growth mode with profits heading toward another record.
• The government or public sector is in recession.
• The financials have very healthy balance sheets and are widening the gap versus European financials.
• Monetary policy is very easy and in reflation mode in the U.S., is about to turn very easy in Japan, and will need to turn that way in Europe soon.
• Fiscal policy is in a slow “fix” mode and will be subtly restricted to GPD (Gross Domestic Product) growth, but not enough to slow the private sector measurably.
• Manufacturing indices have turned upward.
• Leading indicators overall are signaling better cyclical activities ahead.
• China is slowing its property train down. The country is still targeting 7.5 – 8% GDP growth.
• The manufacturing renaissance and energy revolution in the U.S. plus emerging market consumer spending and its growing middle class are the mega trends/themes in the next cycle.
• The condor rises—a majority of fixed income asset classes are earning a negative real return (below 0%). Cash flow in other asset classes is the allocation decision of the next few years.
• Crossover fixed income that does not include the negative real return asset classes and is non-benchmark driven is the most effective Portfolio Manager decision in bonds.
• Maintaining some liquidity (perhaps 40% or so) in short-duration portfolio (below one year) does not have to yield 0%. Adding appropriate higher yielding fixed income securities to a liquidity portfolio can create more attractive cash flows.
• Timber and farm land direct ownership can also add cash flow and yield around 4% – 5% or higher over the next cycle and help diversify portfolios versus financial assets.
• Equities are still valued at a discount—event in the face of the big move this year. Our target is 1600 based on 108 in earnings per share (EPS) and a 15x multiple. If we see EPS heading above 108 in earnings or a “fiscal fix” surprise occurs (the multiple would shift to 16), we would raise our target for this year. Using simple math we can reach 1750 by the end of 2014 as the benefits from reflation and rising household wealth power private sector continue to have a positive impact.
• The real estate and housing turn is working—stay with it. The economy is now benefiting from the turn. We are still positive and expect this to be a multi-year cycle.
• Commodities are like leaves in China’s wind. We have to be very selective across the commodity spectrum as the direction will be bumpy as the world re-balances its growth and needs change. Energy infrastructure is the story here.
• Gold is only a hedge on financial exposure. The metal should be stuck at current levels until inflation worries come later in 2014 – 2015 when the Fed potentially shifts the levers and its policy tools.
• Multi-strategy, long short, macro hedge fund managers should switch to higher net long levels and take advantage of major pair and spread trades around the world. As central bank policy is at different phases and speeds in the G7 this environment should be here to stay for a while.
• Private equity is flush with cash. Corporate cash on balance sheets is double normal levels. EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples are not excessive yet. The M&A (mergers & acquisitions) cycle is accelerating. Small- and mid-market deals and financing are the attractive areas. Larger-head-line deals should be growing too but be more strategic in nature based on the very low cost of financing.
• The rent to own switch in real estate continues. Highly valued office properties are still attractive and opportunistic property story is still building globally.
• Dollar is strong and in a new up cycle. The Euro should remain weak in the next few years. The Yen is weak now and for the foreseeable future, commodity currencies should stay flat to slightly up, and emerging market currencies should grow stronger as the middle class grows.
• Dividend growers, payers, global brands and selling to the emerging market consumer is the area of choice for building equity portfolios over time. Overlay growth ideas in energy, manufacturing, natural gas beneficiaries, emerging markets, healthcare companies, boomer and womenomics beneficiaries, robotics, factory automation, and infrastructure re-development ideas. The portfolio should have yield and growth and not be handcuffed by Washington, Brussels, or Beijing!
• Do not fall into the trap of negative real return assets as the headlines only focus on the concerns we all know. Have a place for the growth spigots that are building!
His report’s disclaimer is longer than the note itself so I’m not printing it. Just to be safe, don’t buy or sell anything or go for a swim or eat or even f***ing breathe after reading this. Good stuff though…