One Man’s Opinion: Are Financials The Cheapest Among Cyclical Stocks In The Market?

ManUS equities are expected to give single-digit returns this year though the initial days look a little bad, said Bob Doll of Nuveen Asset Management. The current market turmoil looks a lot like August last year with plenty of similarities.

China authorities did some things then, and they will do some things now (to calm the markets). Chinese policy makers have to be focused on the domestic economy, and they have to be equally focused on the markets because that’s (the turmoil) exported all over the world. In the meantime, US consumers are doing just fine along with job growth, wage-rate gains and much cleaner individual balance sheets. The US domestic economy may not be doing great, but it’s doing fine, he noted.

Asked if it’s difficult to be an US equity strategist now since oil price forecast and Chinese currency movement is of paramount importance, Bob answered in the affirmative. For the markets to come out of the funk, stabilization of oil prices and a cessation of the dollar’s up-move versus the Yuan would be required, which would be achieved eventually as it was done in August.

Investors would then focus back on the US economy – 87 percent of US GDP is contributed by the domestic sector while exports contribute only 13 percent – far below that of other major economies, he explained.

Nuveen’s 10 predictions for 2016 don’t contain China. Asked how asset managers can ignore China, Bob said China figured in Nuveen’s list last year and it predicted China would fall below the US in terms of contribution to the global GDP growth; for years China contributed more than the US in terms of global growth and it reversed last year.

Nuveen’s second set of predictions related to China was India overtakes China as the fastest growing emerging-market in the world for many years with its population crossing China’s in the next ten year, he observed.

Many people have dismissed Fed deputy chief Stanley Fischer’s prediction of four rate hikes in 2016 as a ballpark figure. In a recent report, Goldman Sachs supported Fischer’s opinion and said if oil prices fell by a further 25 percent and the dollar strengthened by 10 percent, the Fed would still delay the rate-hike cycle by one or two this year and make it up in 2017.

Many people in the market aren’t with the Fed and they simply don’t believe the central bank. Asked to comment, Bob said in last August, the Chinese markets collapsed and despite many investors expecting a rate rise in September, the Fed refused to budge. If the dollar moves up and oil prices sink, the Fed won’t raise rates, he noted.

Asked to comment on Goldman’s prediction of at least two or three rate hikes this year, Bob said the Fed didn’t raise rates in September despite all the same fundamentals existing. The current market turmoil is going to calm down, and when it does, investors would get back to such domestic indicators as wage-rate inflation moving up, the unemployment rate falling below five percent etc, he observed.

Every investor is talking about focusing on the domestic economy while Nuveen thinks non-domestic assets would outperform. Asked to comment, Bob said 2016 should be the transition period as for five years in a row, US bonds outperformed non-US bonds while US equities outperformed in four out of five years. The pinch is going to start switching on the basis that global growth picks up a little bit and foreign trades accelerate a little bit, he noted.

Within the US market, Nuveen likes financials this year though some of the consensus trade coming into the Fed tightening last year didn’t work out at all. Asked if he looks forward to the earnings reports next week as a catalyst, Bob answered in the affirmative. Of the cyclical stocks in the market, financials are the cheapest. If investors want to take exposure in cyclical stocks, they should pick financials. The Fed, on its part, can help the financial sector by raising rates two or three times this year, he concluded.

You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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