FOLLOW US

Rotations out of ‘hyped-up’ sectors

As a team, we do not suggest a complete market selloff, but we are calling for rotations out of drug and pharmaceutical stocks and other sectors that are too ‘hyped up’. Margin shrinkage is likely to occur in healthcare companies, specifically drug companies.

Hillary Clinton managed to drive biotech stocks right down with a single tweet, after which she embarked on a war against big pharma that would create a bear market for this industry. The Trump administration wants to eliminate some of the value of patents which will affect IP-heavy industries the most.

We see positive expansions of multiples and continued revenues in the rebuilding of physical structures and in technology. We also see expansion in spending when it comes to security and other factors related to the safety of the American population.

Our team believes that within the next six months industries will start breaking the trend. A 3% reduction in numbers can result in a 30+% reduction in share prices.

The influence of politics on the market

Politics is a bit of a wild card when it comes to the markets, but it often has less influence than we might expect. One would expect the terrorist attacks, threats of nuclear war and extreme weather events experienced recently to have a negative effect on the markets. This would have happened in the past, but today’s markets seem to be more resilient. An initial knee-jerk reaction may occur, but it usually doesn’t last. We believe this is a temporary rotation.

Industries that look strong over a long period

Some industries look strong over a long period of time. Banks have rallied, and we believe they will continue north.

The huge impact of the Texas and Florida hurricanes and the California fires will drive years of construction and infrastructure spending. We expect increases above 2+ % a year as companies start to benefit from ongoing work in rebuilding infrastructure and private homes. (There is already a 4-year backlog when it comes to the rebuilding of homes in California!).

Real estate plays a big role in the US economy and it is looking strong, benefiting from demographics and popular culture. Watching HGTV has had an influence on Millennials who want to buy their own homes and are probably better informed than previous generations about all the options available. House flipping is becoming popular again, especially in CA.   Companies catering to this generation’s buying potential are likely to flourish.