Smash & Scoop: Market Call for H2 2012.

by royalarse13

With H12012 in the rear view mirror it’s a good time to reflect and consider the investment environment for H22012. General optimism for certain markets in the near-to-intermediate term dominate my thesis, they are documented specifically below.

[To review H1 2012 Market Call click here.  Turned out to be very accurate with major themes, pardon me while I slap my back with vigour.  Proud that I was sufficiently vague to justify being bullish on the US economy!]

Back-End of 2012: Where To?

The next 3-6 months should bring prosperity for investors in Emerging Market corporate bonds, US technology and Apparel companies, food/fertilizer & agriculture-related themes, plus Canadian-government bonds. These markets seem poised for varying degrees of strength, in contrast to global resource & energy plays which could struggle if Europe and China continue their recession and tepid growth respectively.

Expect to witness to further strength in US housing for H22012. As this market turns from complete disaster to resurgent asset class the tangential economic activity will goose GDP higher. Alongside a favourable wealth effect consumers will feel lubricated and spending on luxury goods and services should remain firm, especially since oil is below $100. As the worlds biggest oil importer, Americans pinching pennies may find more disposable income via de facto tax cut from lower oil prices and this should be helpful for $AAPL Apple & $LULU Lululemon. Also, Nike $NKE has also moved closer to $100 after a recent plunge where greedy buyers supported $90 well. True Religion $TRLG fell markedly on recent results from Levis (earnings miss due to higher cotton prices), but remains great value in a luxury goods & apparel.

Monsanto $MON is one to watch, one peek at the chart any novice investor would know its a prime break-out set-up. Agrium $AGU looks strong on the assumption that droughts in North America will produce poor crop yields and that food stuffs will be in scarce supply (US may in fact start importing surplus grain from South America in a huge shift for the #1 corn producer/exporter in the world). Farmers are slashing their fields to collect insurance payouts since the yields are so poor. Wet, cool weather is needed and fast to avoid one of the worst harvests in nearly 30 years. The rain doesn’t appear forthcoming, meaning profits for fertilizer suppliers and GMO seed patent-holder $MON.

Canada is linked very close to China and its GDP, which is probably 5-7% this year, not in the 9-10%+ range in which it’s vacillated for three decades. This will drag on Canadian stocks/mutual funds since TSX is heavily skewed towards energy and commodities, with the banks composing another large share. Given the Canadian housing market faces considerable headwinds there is a high likelihood of 5-10% YoY decline in residential home prices looking out 12 months, this will drag meaningfully on the returns for investors in $ or $EWC and related S&P-TSX60 index funds. Current consumer Debt:GDP is now 95%, the same level at which the US peaked prior to housing bubble collapse and the government is actively manipulating the mortgage market in Canada to engineer a soft landing.

On the debt side, slightly more favourable conditions in Emerging market corporate bonds persist relative to North American issues. If I wanted fixed income to own now and hold for a while I’d find an emerging markets corporate fund (BlueBay asset management) or ETF with exposure to these low-leverage, high growth securities (who historically have similar write-off and recovery rates to similar Developed market issues).

Bonds in developed markets (namely, North America) will probably hold up just fine, but don’t expect out-sized returns at any point along the risk curve. Rather more slow and steady as the chase for yield narrative persists alongside ZIRP. However, stocks are cheap relative to these bonds and there should be some good returns into Xmas.

US corporate bonds have outperformed stocks for the past 3 years. High yield and junk bonds have attracted monstrous inflows and media attention since yields are so low in sovereigns. The likelihood of continued outperformance here is small given equity valuations, earnings and dividend yields. Income-oriented plays will remain in demand but likely lag stocks somewhat in H22012 as the flow of funds reverses into stocks-based funds from Fixed-income related.

Technology turns my crank big time here. All the best growth companies in the world are in this space, so $QQQ should do well under a bullish S&P 500 scenario, I’d expect small caps to perform well too making returns on major indices QQQ > IWM > SPY. Apple $AAPL remains the king and should be owned by all bulls.

As it appears EU still in recession and choking on austerity they are not a place I would expect outperformance from in the next 3-6 months. However, once Greece leaves, or there is a definitive Eurobond deal, Europe could offer some value, just don’t see this as a short term idea, more of a long term home run-type scenario after the drama plays out.

Where overall asset allocation is concerned, international exposure should come in the form of Emerging markets and not Developed, prefer the debt to the equity. In contrast, in North America, I prefer the equity to debt markets and while I have faith in Canada long-term (especially CAD government bonds), for the short term H20212 period, prefer US equities to Canadian. A risk-oriented strategy should resemble 60-70% equities, 30-40% FI, with an overweight position in US tech and emerging market bonds likely presenting the best opportunities on risk:reward basis.

DISCLOSURE: no positions in any ETFs/Securities mentions. Currently about 50% cash, own EM bonds via $ + basket of US tech via $