This edition of Market Factors starts with Morgan Stanley’s chief investment strategist’s favourite sector (mine too) and related stock picks. We move on to why Citi likes the Aussie dollar over the loonie and the scariest moments in movie history.
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Equities
Health care is MS’s new favourite sector
Morgan Stanley chief strategist Michael Wilson is recommending health-care stocks in the current environment and a recent report outlined the bullish argument and presented an analyst list of top picks in the sector. This is catnip for me.
Longer-term readers of this newsletter know I’m a sucker for health-care stocks. Most subsectors are macro-agnostic, largely unfazed by the economic growth environment, for one. The sector also benefits from demographics. An aging population requires more health care which provides revenue growth for the sector without effort on their part.
The current market backdrop is ideally suited for health-care investment, according to Mr. Wilson. The total market cap relative to the S&P 500 is close to historical lows and the strategist expects a reversion to the mean. The forward PE ratio is also close to historic lows.
Federal Reserve rate cuts are also helping the sector. The biggest pharma and biotech players are already on an acquisition spree and this will intensify as money gets cheaper.
Lower rates also dictates a lower discount rate in discounted cash flow calculations. Drug developers, with cash flows on new products well into the future, are more positively affected by discounted cash flow valuation. Fair value by discounted cash flow will increase quickly and significantly as rates decline.
President Donald Trump-related uncertainty is priced in, according to Morgan Stanley. This includes higher input costs from tariffs and threats to squash drug prices.
Within the broad health-care sector, analyst Sean Laaman at Morgan Stanley is specifically bullish on biotech. He writes, “The convergence of favourable macro conditions, emerging cash-rich consolidators, and heightened M&A potential sets the stage for renewed investor focus on biotech.” Medical devices are also preferred, while the analyst urges investors to be selective in the managed care and health care technology subsectors.
The selected stocks by Morgan Stanley analysts are in the table below.
Currencies
Why Citi favours the AUD over the CAD
Citi foreign exchange strategist Daniel Tobon advised clients to buy AUDCAD – the Australian dollar in Canadian dollar terms – which at first makes no sense because both are hugely affected by commodity prices. Let’s discuss.
The Australian dollar is the one to buy when you expect commodity prices to rise because of Chinese growth and the loonie is attractive when the U.S. is set to drive commodity prices higher. Buying AUDCAD is a bet that global growth will improve, and China’s economy will outperform the U.S.
The AUD is Mr. Tobon’s preferred G10 proxy for global risk assets. His expectations for good news out of the U.S./China trade negotiations translates into outperformance by the Aussie dollar.
Inflation is under 1 per cent in Australia and markets have priced in a rate cut by the Reserve Bank of Australia to a significant extent. But Mr. Tobon does not believe a cut is imminent, and the central bank holding fire would be short-term bullish for the Australian dollar. (A rate cut would make local bond yields less attractive to foreign investors so would be negative for the currency value).
Headlines regarding Canada/U.S. trade talks have been contentious, to put it charitably, while the Australians are by and large getting along with their biggest trading partner - another reason to favour the Aussie.
Anthony Hopkins as Hannibal Lecter in Silence of the Lambs.
Diversions
The scariest movie moments ever
I’ve mentioned the Cinefix video channel before as one of my favourite stops on Youtube. I might be boycotting it now because their list of scariest movie moments of all time included terrifying excerpts that cost me sleep.
I have a problem distinguishing what’s on a screen with real life, which means I’m a bad candidate for virtual reality goggles and horror movies. The Cinefix list started with best jump scare, including brief excerpts that doubled my heart rate.
The other categories include slow burn scares, terrifying audio, “what is this terrifying nonsense”, body horror and use of phobias. Winners include Silence of the Lambs, The Shining, The Invisible Man and Eyes Without a Face.
To reiterate, I don’t like horror movies. This list was still fun.
The essentials
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Globe Investor highlights
Jamie McGeever points out that market concentration on Wall Street is actually not that extreme by global standards
Tech stocks are trouncing utilities, something David Berman notes is unusual in a historical context
Ian Tam of Morningstar presents a list of ETFs and mutual funds containing stocks that still have reasonable valuations
Quick hits
- When I was a noob investor I looked for low PE (price to earnings) stocks that were neglected but during the last 15 years the big gains were from already expensive momentum stocks.
- The extent investors are comfortable with the proliferation of private equity funds correlates to the degree they know or remember what happened with labour sponsored funds.
- I’m not sure if this is still the case but the popularity of responsible, environmentally friendly investments has historically been inversely proportional to the crude price.
- Electronics Arts posted an earnings miss Tuesday ahead of its takeout by private equity firms. Remember when Esports was a hot investment theme? What a time.
See our full earnings and economic calendar here