4Q Industrial Sector Summary

Published on October 19, 2016October 19, 2016 by David Simpson, CFA

The 4Q Industrial Sector Summary is a highlight of the sector’s performance and outlook.

US equity indexes are within the summer’s range. A bullish rotation within equities may be taking place as third quarter earnings season are announced. Expectations have been downgraded over the past couple of months. Thus, it sets up the likelihood of a good quarter relative to expectations.

However, some improvement was present in economic data and higher inflation readings. Accordingly, this leaves the possibility of tighter monetary policy from the Fed and even other central banks.

Winners

The financial-services sector remains somewhat undervalued and recently traded at a reasonable valuation while awaiting a stricter Clinton regulatory environment but holding out hope for rising interest rates.

Firms with exposure to the smart phone market have faced some tough times, but the strong secular shift away from feature phones and toward more-advanced smartphones is still intact.

Losers

Telecom is fairly valued at price/fair value. It is somewhat immune to geopolitical changes and Brexit will have little effect on cross-border transfers of voice or data.

As central banks around the world continue to experiment with ultra-loose monetary policy, utilities continue to hold their place as tone of he best-performing sectors in 2016.

On Par

Consumer Discretionary, Consumer Staples, Energy, Healthcare, Industrials, Materials and Real Estate are expected to match market pace.

3Q Industrial Sector Review and Outlook

Published on July 18, 2016July 18, 2016 by David Simpson, CFA

The Brexit vote caught the market off-guard and though recovered nicely, Brexit left more questions than answers with resolution far in the distance.

Business in Britain will not come to a complete stop and the exposure of most US firms appears to be limited.

It’s too early to make sector changes so investors should stay diversified. Any realignment depends on the political decisions of UK and EU policymakers which are impossible to predict.

Sector Summary

S&P Wgt%	Name	Tilt	Comment
6.60	Energy	Market	Declining U.S. oil production over the next several quarters will help reduce global oversupply, but wont fix the imbalance before 2017. Reduced investment translates to output declines and helps markets rebalance. Energy sector valuations are high.
2.80	Materials	Market	Optimism continues to reign in Materials year to date, but investors are overestimating the sustainability of recent commodity price rallies, leaving the sector severely overvalued. The reasons for rallies differ, but won't stick.
10.10	Industrials	Market	Industrials outperformed the broader market since early February but remains undervalued. U.S. manufacturing data has turned slightly positive in recent months, while manufacturing across the rest of the world has been challenged.
12.90	Consumer Discretionary	Market	The market seems to be underestimating longer-term revenue growth and margin expansion opportunities in this volatile group as measured by relative PEs, especially with its healthy high-end consumer sentiment.
10.70	Consumer Staples	Market	Consumer Staples valuations have continued to trend higher over the past several months, leaving the sector slightly overvalued. In light of slowing growth prospects around the world, sluggish revenue growth are expected.
14.70	Health Care	Market	Market valuations in healthcare have improved over the last quarter. Strong drug launches and excellent rapidly progressing clinical data in specialty-care areas are supporting increased productivity at drug and biotech companies.
15.60	Financials	Over	Brexit effects on interest rates, currency exchange rates, asset price levels, and capital market volatility will likely be more material to earnings than problems caused by relocating operations out of the UK to EU countries.
20.40	Information Technology	Over	Overall, we view the tech sector as fairly valued though we continue to see opportunities in smartphone related vendors. Microsofts evolution will yield long-term success. When the chips are down, bet on capital equipment firms.
2.80	Telecom Services	Under	Brexit fears have pushed down most European Telecom stocks which is an overreaction. Telecom is somewhat immune to geopolitical changes and Brexit will have little effect on cross-border transfers of voice or data.
3.40	Utilities	Under	Utilities have kept its foot on the gas during the second quarter. The spread between U.S. utilities 3.6% average dividend yield and 1.6% 10-year U.S. Treasuries suggests utilities have a long way to run.

2Q Industrial Sector Review and Outlook

Published on May 17, 2016July 18, 2016 by David Simpson, CFA

Sector Summary

S&P Wgt%	Name	Tilt	Comment
6.60	Energy	Market	Declining U.S. oil production over the next several quarters will help reduce global oversupply, but wont fix the imbalance before 2017. Reduced investment translates to output declines and helps markets rebalance. Energy sector valuations are high.
2.80	Materials	Market	Optimism continues to reign in Materials year to date, but investors are overestimating the sustainability of recent commodity price rallies, leaving the sector severely overvalued. The reasons for rallies differ, but won't stick.
10.10	Industrials	Market	Industrials outperformed the broader market since early February but remains undervalued. U.S. manufacturing data has turned slightly positive in recent months, while manufacturing across the rest of the world has been challenged.
12.90	Consumer Discretionary	Market	The market seems to be underestimating longer-term revenue growth and margin expansion opportunities in this volatile group as measured by relative PEs, especially with its healthy high-end consumer sentiment.
10.70	Consumer Staples	Market	Consumer Staples valuations have continued to trend higher over the past several months, leaving the sector slightly overvalued. In light of slowing growth prospects around the world, sluggish revenue growth are expected.
14.70	Health Care	Market	Market valuations in healthcare have improved over the last quarter. Strong drug launches and excellent rapidly progressing clinical data in specialty-care areas are supporting increased productivity at drug and biotech companies.
15.60	Financials	Over	Brexit effects on interest rates, currency exchange rates, asset price levels, and capital market volatility will likely be more material to earnings than problems caused by relocating operations out of the UK to EU countries.
20.40	Information Technology	Over	Overall, we view the tech sector as fairly valued though we continue to see opportunities in smartphone related vendors. Microsofts evolution will yield long-term success. When the chips are down, bet on capital equipment firms.
2.80	Telecom Services	Under	Brexit fears have pushed down most European Telecom stocks which is an overreaction. Telecom is somewhat immune to geopolitical changes and Brexit will have little effect on cross-border transfers of voice or data.
3.40	Utilities	Under	Utilities have kept its foot on the gas during the second quarter. The spread between U.S. utilities 3.6% average dividend yield and 1.6% 10-year U.S. Treasuries suggests utilities have a long way to run.