Friday, February 11, 2011

JPM: Energy and Materials outperform

US Equity Strategy FLASH: Past inflationary episodes in 9 countries show Energy and Materials outperform....

Click here for the full Note and disclaimers. 
The two most encouraging economic data points in the past week, in our view, were the expansion of consumer credit ($6.1b vs. St $2.4b) and the rise in small biz optimism (NFIB 94.1 vs. prior 92.6) – improvement in two areas of this recovery which have been subnormal (credit expansion and small biz optimism). Notably, small-biz sales expectations (SBOISALS Index <>) of 13% is the highest level since 2007 (see Figure 3) – by inference, that revenue visibility recovered, thus setting the stage for small business hiring.
  • *  In the meantime, equity prices continue to show impressive resilience as incoming equity flows (US equity inflows have been up for six weeks now and reached $21b YTD) result in a steady bid for equities – again, an improvement in circumstances compared to 2010. We maintain our view that the likely trajectory for stocks is to drift higher, toward the 1333 level, before we see some pullback.
  • *  The greatest concern, in our view, remains inflation and, in particular, the fact that monetary policy remains too easy in many emerging markets (see “Circle of Life...” dated 2/4/11). We decided to examine sector relative performance during periods of rising inflation looking at 9 countries (see Figure 5).
  • *  INFLATIONARY EPISODE IN 9 COUNTRIES SHOW ENERGY AND MATERIALS OUTPERFORM. We found sector performance varied between DM and EM, and, in DM, Energy and Basic Materialsoutperformed during periods of inflation (see Figure 6). Energy had a hit-rate of 71% and average 6-month relative outperformance of 5% while Basic Materials was 71% and 4%. The worst-performing groups are Telecom and Utilities, not surprising given their yield component.
  • *  THE TAKEAWAY? THE RISE IN INFLATIONARY PRESSURES SUGGESTS STICKING WITH CYCLICALS FOR NOW. The primary takeaway, in our view, is that favoring Cyclicals for now works even in the context of rising inflation. And as we noted in the past, we remain more concerned about inflationary pressures in EM relative to the US (and developed markets broadly).
  • *  16 IDEAS: In top half of sector relative performance. We developed a list of companies which history suggests are well-positioned for a rise in inflation. The following criteria were used: (i) In one of the top five sectors from past periods of rising inflation, based on hit rate (Staples, Energy, Healthcare, Materials, Industrials); (ii) Top quartile of Large Cap (>$10.4b); (iii) Lowest quartile of P/E (<13.3x); (iv) Rated OW by J.P. Morgan; (v) At least 10% upside implied by JPM target price. The average P/E (2011E) is 10.1x with 23% upside projected by J.P. Morgan target prices. The tickers are: NEM, ABX, PFE, TEVA, MRK, CVS, FCX, ABT, APA, AMGN, GILD, WLP, AET, COV, CI, and BTU.

Glad to see, after 22 months, and after HUNDREDS of % moves, JPM has finally come around to my thinking!!

Friday, May 1, 2009

The material market!!

Today was Day 1 of the material ramp! And CNBS even had the audacity to tout the burgeoning new bull market in the material stocks. Why else do you think I have been touting them?

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